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UNIVERSITY    OF   WISCONSIN 


MONEY 

A   STUDY   OF  THE  THEORY   OF  THE 
MEDIUM   OF   EXCHANGE 


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Money 

A  Study  of  the  Theory  of  the 
Medium   of  Exchange 


BY 


DAVID    KINLEY,   PH.D. 

PROFESSOR    OF   ECONOMICS   AND    DEAN   OF  THE 

COLLEGE   OF   LITERATURE   AND   ARTS,   IN 

THE   UNIVERSITY  OF   ILLINOIS 


THE   MACMILLAN    COMPANY 

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All  rights  reserved 


COPYRIGHT,  1904, 
Bv   THE   MACMILLAN   COMPANY. 


Set  up  and  electrotyped.      Published  July,  1904.     Reprinted 
January,  1909  ;  January,  ign  ;  March,  1913. 


J.  8.  Cushinp  Co.  —  Berwick  <k  Smith  Co. 
Norwood,  Mass.,  U.S.A. 


PREFACE 

THE  present  book  is  an  attempt  to  present  a 
systematic  exposition  of  the  theory,  or  scientific 
principles,  of  money.  The  historical  and  descrip- 
tive literature  of  the  subject  is  already  so  volumi- 
nous and  rich  that  I  have  not  thought  it  best  to 
enter  that  field,  excepting  where  necessary  for 
purposes  of  illustration,  and  in  those  cases  I  have 
made  my  references  as  brief  as  possible. 

I  began  the  work  at  the  time  when  Walker's 
"Money"  and  Jevons's  "Money  and  the  Mechan- 
ism of  Exchange  "  were  the  only  books  we  had  in 
English  which  purported  to  do  what  I  had  in 
mind,  and  I  expected  to  have  my  task  completed 
long  ago.  Many  things  have  postponed  this  com- 
pletion until  now.  The  field  which  I  attempt  to 
cover  has  recently  been  occupied  by  Professor 
Laughlin's  "  Principles  of  Money "  and,  in  part, 
by  Professor  Scott's  "  Money  and  Banking."  If 
my  own  book  had  not  been  practically  all  written 
at  the  time  of  the  appearance  of  these  works,  I 
might  not  have  written  it  at  all;  but  as  so  much 
of  it  was  already  done,  it  seemed  best  to  me  to 
finish  it. 

It  is  my  hope  that  some  new  points  will  be 
found  in  the  work,  although  I  am  painfully  aware 


vi  PREFACE 

of  the  likelihood  that  what  is  new  may  not  be 
important,  and  what  is  important  may  not  be  new. 
As  Jevons  once  wrote,  "  I  am  far  from  supposing 
that  the  exact  relations  in  regard  to  prices,  com- 
modities, gold,  and  capital  have  been  hit  upon.  I 
do  not  believe  that  any  of  our  economists  have 
yet  untied  this  Gordian  knot  of  economic  sci- 
ence, although  some  cut  it  in  a  very  unhesitating 
manner."1 

It  will  be  seen  that  neither  in  my  view  of  the 
influence  of  credit,  nor  of  the  relation  of  the  quan- 
tity of  money  to  its  value,  am  I  in  accord  with 
Professor  Laughlin  or  Professor  Scott.  I  take 
occasion,  however,  to  express  my  appreciation  of 
the  high  quality  of  both  works  and  of  the  help 
they  have  both  given  me.  The  authorities  to 
whom  I  am  indebted  are  too  numerous  to  mention 
specifically.  The  references  at  the  beginning  of 
each  chapter  will  indicate  in  a  general  way  where 
I  have  found  my  inspiration  and  my  help. 

I  am  indebted  to  several  friends  for  help  in 
carrying  out  my  work.  In  the  first  place,  I  wish 
to  express  my  warm  appreciation  of  the  kindly 
patience  and  inspiring  helpfulness  of  my  friend, 
the  editor.  Without  his  encouragement  I  doubt 
very  much  whether  I  would  have  had  patience  to 
finish  the  work,  owing  to  the  harassing  incidents 
of  my  administrative  work.  Next,  I  am  deeply 
indebted  to  my  colleague,  Professor  N.  A.  Weston, 
who  has  read  a  large  part  of  the  manuscript  and 

5 "  Investigations  in  Currency  and  Finance,"  p.  32. 


PREFACE  vii 

;riticised  it,  I  am  glad  to  say,  somewhat  severely. 
His  criticisms  of  the  new  points,  however,  were 
from  the  standpoint  of  accepted  doctrines,  and, 
after  considering  them  carefully,  I  decided  that  I 
must  let  my  innovations  stand.  To  Professor 
Weston  also  belongs  the  credit  of  preparing  the 
bibliography  at  the  end  of  the  book.  It  is  design- 
edly confined  mainly  to  Money,  to  the  exclusion 
of  Credit  and  Banking.  Professor  M.  B.  Ham- 
mond, Professor  M.  H.  Robinson,  and  Mr.  L.  W. 
Zartman,  Fellow  in  Economics,  have  also  given 
me  assistance,  which  I  am  glad  to  acknowledge. 
I  hope  soon  to  supplement  this  book  with  one 
on  Credit  and  Banking. 


DAVID   KINLEY. 


UNIVERSITY  OF  ILLINOIS, 
March  16,  1904. 


CONTENTS 

CHAPTER   I 
THE  SOCIAL  IMPORTANCE  OF  MONEY 

SECTION  PAGE 

1.  The  Intimate  Connection  of  the   System   of  Exchange 

with  Social  Progress     .......          I 

2.  Adaptation  of  the   Monetary  System  to  the   Prevailing 

Stage  of  Economic  Life       ......         3 

3.  Relation   of  the  Monetary  System   to  the  Scale  of  In- 

comes ..........         4 

4.  Division  of  Labor  and  the  Monetary  System    ...         5 

5.  The     Monetary    System    and    Political    and    Economic 

Freedom       .........  6 

6.  The  Monetary  System  and  Nationality      ....  8 

7.  The  Monetary  System  and  Economic  Prosperity       .         .  9 

8.  The  Monetary  System  and  the  Distribution  of  Wealth     .  n 

9.  The  Socialistic  View  of  the  Monetary  System           .         .  13 

CHAPTER   II 

THE  EVOLUTION  OF  MONEY 

1.  The  Conjectural  Character  of  Early  Monetary  History     .  14 

2.  The  Character  of  Monetary  Evolution      .         .          .  17 

3.  The  First  Service  of  the  Money  Article  ....  19 

4.  The  Selection  of  the  Money  Commodity          ...  20 

5.  Kind  of  Article  Selected  .......  22 

6.  Subdivision  of  the  Money  Article     .....  23 

7.  Influence  of  the  Market  on  the  Evolution  of  Money        .  24 

8.  The    Complex    Character    of    the    Mechanism    of    Ex- 

change           25 


CONTENTS 


CHAPTER   III 
COINAGE 

SECTION  PAGE 

1.  Natural  Objects  as  Monetary  Units 27 

2.  The  Nature  and  Purpose  of  Coinage        ....  28 

3.  The  Evolution  of  Coinage 29 

4.  The  Requisites  of  Good  Coinage 31 

5.  Government  versus  Private  Coinage  33 

6.  The  Charge  for  Coinage ;   Seigniorage     ....  34 

7.  The  Arguments  for  and  against  a  Charge  for  Coinage      .  35 


CHAPTER   IV 
THE  CURRENCY  AND  THE  PRINCIPLES  OF  ITS  CIRCULATION 

1.  Classification  of  Media  of  Exchange        ....  39 

2.  Adaptation  of  the  Medium  of  Exchange  to  the  Scale  of 

Incomes  and  Prices      .......  41 

3.  The  Credit  Portion  of  the  Medium  of  Exchange      .         .  43 

4.  Securities  as  a  Part  of  the  Medium  of  Exchange     .         .  45 

5.  Standard  Money,   Money  of  Account,   and   Medium  of 

Exchange 46 

6.  Legal  Tender  Money -47 

7.  Systems  of  Metallic  Currency 47 

8.  Systems  of  Paper  Currency 49 

9.  Fundamental  Causes  of  Circulation  of  Media  of  Exchange  50 
10.    Gresham's  Law;   its  Operation  and  Limitations        .         .  52 

CHAPTER  V 

SERVICES  AND  NATURE  OF  MONEY 

1.  Definition  of  Money  determined  by  its  Services       .         .  59 

2.  Essential  Services  of  Money 60 

3.  The  Derived  Functions  of  Money 63 

4.  Contingent  Functions  of  Money 65 

5.  Money  the  Embodiment  of  Generic  Value       ...  67 

6.  Definitions  of  Money 68 


CONTENTS  xi 

SECTION  PAGE 

7.  The  Fundamental  Causa  of  Superiority  of  Commodity 

Money          .         .         .         .         .         .  .         .         .71 

8.  Characteristics  of  Good  Commodity  Money  ...       72 


CHAPTER   VI 
THE  MOVEMENT  AND  DISTRIBUTION  OF  METALLIC  MONEY 

1.  Emphasis  laid  upon  the  Supply  of  Money        ...       78 

2.  The  Division  of  the  Precious  Metals  depends  upon  the 

Relative  Demand  of  Different  Countries       ...       79 

3.  The  Value  of  the  Precious  Metals  not  everywhere  the 

Same    ..........       80 

4.  Changes  in  Prices,  and  the  Movement  of  the   Precious 

Metals 8l 

5.  Price  Changes  not  necessarily  followed  by  a  Movement 

of  Specie     .........       82 

6.  The  Ricardian  Theory  modified  by  Economic  Friction     .       86 

7.  Influence  of  the  Credit  Mechanism  on  the  Distribution 

of  the  Precious  Metals 89 

8.  The  Effect  of  the  Use  of  Bills  of  Exchange  on  the  Move- 

ment of  the  Metals 90 

9.  Other  Causes  which  render  Export  of  the  Precious  Metals 

Unnecessary          ........       93 

10.  The  Usual  Causes  of  the  Movement  of  Specie         .         .       95 

11.  The  Amount  of  Money  needed  by  a  Country  ...       97 


CHAPTER  VII 

THE  STATIC  DISTRIBUTION  OF  THE  PRECIOUS  METALS 

1.  Distribution  of  Money  in  the  Sense  of  Apportionment    .       99 

2.  Conditions  of  the  Apportionment    .....     100 

3.  An  Increased  Volume  of  Exchanges  requires  Larger  or 

More  Efficient    Medium  of  Exchange,  but  not  neces- 
sarily More  Money        .......     101 

4.  The  Amount  of  Metallic  Money  in  a  Country  tends  to  a 

Minimum     .........     104 


xii  CONTENTS 

SECTION  PAGE 

5.  Readjustments   in  the   Exchange   System   caused   by  a 

Demand  for  More  Medium  of  Exchange      .         .         .     105 

6.  The  Extension  of  Credit  Exchange  Slower  as  the  Volume 

of  Exchanges  Increases 108 

7.  Other    Conditions  which    retard  the   Growth   of  Credit 

Exchanges 112 

8.  Periodic  Character  of  the  Growth  of  Money  and  Credit 

Payments 114 

9.  Relation  of  the  Theory  of  this  Chapter  to  the  Amount  of 

Money  needed  by  a  Country 119 

10.   Artificial  Increase  of  the  Money  Supply  Inexpedient        .     121 


CHAPTER  VIII 

THE  VALUE  OF  MONEY 

1.  Difficulty  of  the  Subject 123 

2.  The  Price  Level  distinguished  from  Relative  Prices          .     124 

3.  Conditions  assumed  to  simplify  the  Problem     .          .         .125 

4.  The  Value  of  Money  a  Social  Fact  .         .         .         .         .125 

5.  Advantage  of  replacing  Barter  with  Money  Exchange     .     126 

6.  The    Maximum    Value    of  the    Money  Supply  which  a 

Society  can  afford  to  Have  .         .         .         .  127 

7.  The  Minimum  Value  of  the  Money  Supply  to  a  Society  .     129 

8.  The  Unreality  of  the  above  Conditions  and  the  Actual 

Limits  of  the  Money  Supply        .....     130 

9.  Limitation  upon  the  Freedom  of  Choice  between  Barter 

and  Money  Exchange 133 

10.  The  Relation  of  the  Quantity  of  Goods  to  their  Marginal 

Utilities 134 

11.  The   Value   of  Money  at   any  Moment   determined   by 

Demand  and  Supply     .          .         .         .          .         .         .135 

12.  The  Quantity  of  Money  and  its  Value      ....      139 

13.  The  Relation  of  Quantity  and  Value  in  the  Case  of  Com- 

modity Money      ........     141 

14.  The   Establishment   of  Equilibrium   among  the  Various 

Demands  for  the  Money  Commodity    ....     144 

15.  The  Volume  of  Business  and  the  Value  of  Money  .         .     146 


CONTENTS  xiii 


CHAPTER   IX 

STABILITY  OF  THE  VALUE  OF  MONEY 

SECTION  PAGE 

1.  Nature  of  the  Price  Level 150 

2.  Rapidity  of  Circulation 151 

3.  Influence  of  the  Rapidity  of  Circulation  on  the  Price  Level     155 

4.  Factors  which  affect  the  Rapidity  of  Circulation      .         .156 

5.  Reciprocal  Action  of  Demand  and  Supply  on  the  Value 

of  Money 158 

6.  Effect  of  Possible  Resort  to  Barter  or  Credit  Exchange 

on  the  Value  of  Money         .         .         .         .         .         .160 

7.  Effect  of  a  Change  in  the  Quantity  of  Money  on  Pro- 

duction        .         .         .         .         .         .         .         .         .162 

8.  The  Cost  of  Production  of  the  Money  Article  and  its 

Value 163 

9.  The  Production  of  the  Precious  Metals    .         .         .         .165 

10.  The  Influence  of  the  Increased  Production  of  Gold  on 

its  Value       .         .         .         .         .         .         .         .         .167 

11.  The  Cost  of  its  Money  Supply  to  a  Country     .         .         .     171 

12.  Changes  in  Relative   Prices   consequent   on   Changes  in 

General  Prices 172 


CHAPTER   X 

SIGNIFICANCE  AND  CAUSES  OF  CHANGES  IN  THE  VALUE 
OF  MONEY 

1.  Questions  to  be  discussed  in  this  Chapter          .         .         .176 

2.  Different  Meanings  of  Appreciation  and  Depreciation      .      177 

3.  Different  Manifestations  of  Appreciation  and  Depreciation      179 

4.  Various  Phases  of  Appreciation 1 80 

5.  Importance  of  the  Distribution  of  the  Effects  of  Appre- 

ciation and  Depreciation      ......     182 

6.  Different  Effects  of  Appreciation   under  Different  Con- 

ditions   184 

7.  The    Effect    of   Appreciation   transmitted    from  Class  to 

Class 185 

8.  The  Normal  Case  of  Falling  Prices 187 


xiv  CONTENTS 


9.   The  Effects  of  Appreciation  on  Debtors  and  Creditors     .  190 

10.  Comparative  Disadvantages  of  Appreciation  and  Depre- 

ciation         .........  191 

11.  Causes  of  Appreciation  and  Depreciation         .         .         .  193 

12.  Effect  of  Changes  in  Production  on  the  Value  of  Money  .  196 

CHAPTER  XI 
CREDIT  AND  PRICES 

1.  Meaning  of  Credit 199 

2.  Nature  of  Credit  Transactions          .         .         .         .         .201 

3.  Credit  Documents    ........  202 

4.  Difficulty  of  determining  the  Effect  of  Credit  on  Prices  .  202 

5.  Different  Theories  of  the  Relation  of  Credit  to  Prices     .  203 

6.  Credit  One  of  the  Determinants  of  the  Price  Level          .  205 

7.  The  Effect  of  Credit  on  Prices  depends  on  the  Complete- 

ness of  the  Cancellation  of  Indebtedness     .         .         .  206 

8.  Causes  which  produce  a  Permanent  Balance  of  Indebted- 

ness which  must  be  settled  with  Money        .         .         .  208 

9.  The  Influence  of  Reserves  of  Money  for  Credit  Transac- 

tions on  its  Value          .......  212 

10.  Limits  of  the  Influence  of  Credit  on  Prices     .         .         .  214 

11.  Interaction  of  the  Demand  for  Money  for  Reserves  and 

for  Direct  Exchanges 215 

12.  Influence  of  Different  Kinds  of  Credit  Transactions  on 

Prices 219 

13.  Deposit  Currency 221 

CHAPTER  XII 

THE  MEASUREMENT  OF  VARIATIONS  IN  THE  PUR- 
CHASING POWER  OF  MONEY 

1.  On  the  Possibility  of  measuring  Changes  in  the  Value  of 

Money 224 

2.  The  Importance  of  Measurements  of  Price  Changes        .  225 

3.  Nature  of  the  Problem     .......  226 

4.  Index  Numbers         ........  227 

5.  Limitations  of  Index  Numbers 230 


CONTENTS  xv 


6.  The  Kind  of  Average  used  in  computing  Index  Numbers  231 

7.  The   Number   of  Articles   necessary   to   furnish    Proper 

Averages 233 

8.  Relative  Proportions,  or  Weights,  of  Articles  Used           .  234 

9.  Influence  of  New  Commodities         .....  236 

10.  Whether  Wholesale  or  Retail  Prices  furnish  the  Better 

Comparison           ........  237 

11.  The  Different  Purposes  of  Tables  of  Prices  determine 

their  Character     ........  237 

12.  The  Services  of  Tables  of  Prices     .....  239 

13.  The  Best  Kind  of  Table  for  General  Purposes          .         .  242 

14.  The  Similarity  of  Results  in  Different  Tables  .         .         .  244 

15.  The  Table  of  the  London  Economist       ....  245 

1 6.  The  Work  of  Jevons  on  Index  Numbers           .         .         .  247 

17.  Soetbeer's  Tables 247 

18.  Sauerbeck's  Tables 250 

19.  Falkner's  Tables 253 

20.  Other  Tables  of  Prices 256 

21.  Other  Methods  of  measuring  Price  Changes    .         .         .  256 

22.  Professor  Edgeworth's  Presentation  of  the  Solutions  of 

the  Problem  of  measuring  Price  Changes     .         .         .  258 

CHAPTER   XIII 
THE  STANDARD  OF  DEFERRED  PAYMENTS 

1.  Definition  of  the  Standard 260 

2.  Steadiness  of  the  Standard  Important  for  Deferred  Pay- 

ments    261 

3.  Assignment  of  the  Gain  or  Loss  due  to  a  Change  in  Prices  262 

4.  Apportionment  of  Gain  or  Loss  due  to  Change  in  Prices 

between  Creditor  and  Debtor       .....  264 

5.  The  Standard  of  Deferred  Payments  a  Social  Concept, 

not  a  Corrective  of  Individual  Fluctuations  .         .         .  266 

6.  An  Invariable  Standard  Undesirable  and  Impossible         .  268 

7.  The  Incompatibility  of  Returns  of  Equal  Value,  Equal 

Utility,  etc 269 

8.  Classification  of  Standards  of  Deferred  Payments    .         .  272 

9.  The  Single  Commodity  Standard       .....  273 


xvi  CONTENTS 


10.  The   Nature   of  the   Tabular,   or    Multiple   Commodity, 

Standard       .........  275 

11.  The  Equity  of  the  Multiple  Standard        ....  277 

12.  Theoretical    and    Practical    Objections   to   the    Multiple 

Standard       .........  279 

13.  The  Labor-time  Standard 281 

14.  The  Labor-cost  Standard           ......  281 

15.  The  Disutility  of  Labor  Standard    .....  283 

1 6.  The  Marginal  Utility  Standard 284 

17.  The  Total  Utility  Standard 285 

18.  The  Purchaser's  Surplus  Standard 287 

CHAPTER   XIV 

BIMETALLISM 

1.  The  Nature  of  Bimetallism       ......  292 

2.  The  Advantages  claimed  for  Bimetallism           .         .         .  294 

3.  The    Maintenance    of  the    Chosen    Ratio    of   Exchange 

between  Gold  and  Silver      ......  296 

4.  Some  Factors  adverse  to  the  Maintenance  of  the  Ratio  .  299 

5.  Bimetallism  and  Fluctuations  of  the  Price  Level      .         .  301 

6.  Bimetallism  as  a  Relief  from  the  Burden  of  Debts  .         .  304 

7.  Bimetallism  would   not  provide  a   Slowly  Depreciating 

Currency      .........  306 

8.  Obstacles  to  International  Bimetallism     ....  307 

9.  The  Increase  in  Gold  and  the  Bimetallic  Agitation  .         .  309 

10.  Symmetallism  .         .         .         .         .         .         .         .         .311 

11.  Neo-bimetallism 312 

12.  Commissions  to  regulate  the  Price  Level           .         .         .  313 

CHAPTER   XV 

SOME  FACTORS  WHICH  MODIFY  THE  INFLUENCE  OF 
PRICE  CHANGES 

1.  Cause  of  the  Demand  for  Steadiness  of  the  Price  Level    .  317 

2.  Industrial   Improvements  diminish  the  Burden  of  Debts 

of  Producers         ........  318 

3.  The  Debtor  Class  also  a  Creditor  Class     .         .         .         .319 


CONTENTS  xvii 

SECTION  PAGE 

4.  Debts  contracted  for  Profit 320 

5.  Effect  of  shortening  the  Period  of  Debts          .         .         .  320 

6.  The  Influence  of  the  Speculator  in  diminishing  the  Effect 

of  Price  Changes           .......  322 

7.  The  Influence  of  the  Rate  of  Interest  on  the  Burden  of 

Debts 322 

8.  Difficulty  of  doing  Justice  by  Artificial  Corrections   of 

Price  Changes      ........  326 

9.  Gold  Monometallism  probably  does  Substantial  Justice 

in  the  Long  Run 327 

CHAPTER   XVI 

INCONVERTIBLE  PAPER  MONEY 

1.  Kinds  of  Paper  Money    .......  329 

2.  Meaning  of  Convertibility         ......  330 

3.  Characteristics  of  Irredeemable  Paper      ....  331 

4.  Benefits  and  Dangers  of  Irredeemable  Paper  .         .         .  333 

5.  Influence  of  the  Issue  of  Irredeemable  Paper  on  Specie  335 

6.  Signs  of  Excessive  Issue  .......  337 

7.  The  Relation  of  the  Quantity  of  Inconvertible  Paper  to 

its  Value 339 

8.  The  Effect  of  an  Issue  of  Paper  Money  on  the  Price  Level  341 

9.  The  Premium  on  Gold  and  the  Depreciation  of  Paper  in 

Commodities         ........  344 

10.  Special   Provisions  for    maintaining  the  Value   of  Irre- 

deemable Paper  ........  347 

11.  The  Evils  of  Irredeemable  Paper 349 

12.  The  Fiscal  Advantage  of  Irredeemable  Paper          .         .  350 

13.  Motives  to  the  Issue  of  Irredeemable  Paper    .         .         .  351 

14.  Some  Noted  Historical  Examples  of  Irredeemable  Paper  352 

15.  Regulation  of  Irredeemable  Paper  .....  353 

CHAPTER   XVII 

CONVERTIBLE  PAPER  CURRENCY 

1.  By  whom  Convertible  Paper  Notes  are  Issued  .         .         .  355 

2.  The  Advantages  of  Government  Convertible  Currency     .  356 


xviii  CONTENTS 

SECTION  PAGE 

3.  Convertible  Bank  Paper 358 

4.  The  Meaning  of  the  Term  "  Elasticity "  as  applied  to 

Convertible  Paper  Currency 359 

5.  On  the  Desirability  of  Elasticity 361 

6.  The  Banking  Theory  and  the  Currency  Theory  of  Note 

Issue 363 

7.  The  Power  of  a  Bank  to  force  its  Paper  into  Circulation  365 

8.  Some  Practical  Considerations  which  modify  the  Above 

Conclusions .........  369 

9.  Provision  of  Proper  Safeguards  for  Note  Issue         .         .  372 

10.  Regulation  of  Note  Issues  by  limiting  their  Volume         .  373 

11.  Regulation  of  Note  Issues  by  controlling  Reserve    .         .  374 

12.  The  Minimum  Reserve  Method 375 

13.  Proportional  Reserve  Method  ......  476 

14.  Simple  Deposit  Method 376 

15.  The  Partial  Deposit  Method 377 

1 6.  The  Bond-deposit  Method 378 

17.  The  Safety-fund  Method 381 

18.  Notes  issued  on  General  Assets 382 

19.  The  Advantages  of  combining  Several  Methods       .         .  383 

20.  Comparative  Advantages  and  Disadvantages  of  Govern- 

ment and  Bank  Issues 385 


MONEY 


MONEY 

CHAPTER  I 

THE   SOCIAL   IMPORTANCE   OF   MONEY 

REFERENCES  :  Buckle,  H.  T.,  History  of  Civilization  in  Eng- 
land, Vol.  II.,  p.  318;  Del  Mar,  Alex.,  Money  and  Civilization; 
Harper,  J.  W.,  Money  and  Social  Problems,  Ch.  3;  Jevons,  W.  S., 
Money  and  the  Mechanism  of  Exchange,  Chs.  1,15;  Nicholson,  J.  S., 
Money  and  Monetary  Problems,  5th  ed.,  pp.  16-17,  107-110; 
Tucker,  George,  Theory  of  Money  and  Banks,  Ch.  3. 

1.  The  Intimate  Connection  of  the  System  of 
Exchange  with  Social  Progress.  — We  are  so  accus- 
tomed to  the  conveniences  of  the  modern  system 
of  exchange  that  we  seldom  reflect  on  its  historical 
significance  or  its  present  importance.  Yet  that 
system  is,  in  a  way,  an  epitome  of  the  history  of 
civilization.  There  is  no  phase  of  life  which  the 
system  of  exchange,  or  the  monetary  system,  has 
not  affected ;  there  is  no  byway  of  the  life  of  the 
individual,  or  of  society,  into  which  its  influence 
does  not  reach. 

jbome  writers  minimize  the  importance  of  the 
monetary  system  of  exchange  as  a  factor  in  prog- 
ress and  prosperity.  Some,  ethically  inclined,  and 
influenced  by  the  evils  which  spring  from  the  bad 
use  of  money  and  credit,  insist  that  these  means 


MONEY 

of  exchange  are  not  necessary  to  industry,  and 
think  to  purify  society  by  abolishing  them.  Others, 
with  Mill,  look  at  money  as  a  third  wheel,  and  tell 
us  that  "  there  cannot  ...  be  intrinsically  a  more 
insignificant  thing,  in  the  economy  of  society."  1 
It  is  a  little  difficult  to  get  the  point  of  view  from 
which  a  writer  of  Mill's  logical  sense  could  make 
a  remark  so  wide  of  the  truth.  Far  from  playing 
an  unimportant  rdle,  money  is  now,  more  than 
ever  before,  a  social  necessity ;  as  necessary  to  the 
easy  exchange  of  material  goods  as  is  writing  or 
printing  to  the  interchange  of  ideas.  So  inter- 
woven with  all  phases  of  the  life  of  society  is  the 
modern  system  of  exchange  that  were  it  suddenly 
destroyed,  much  that  is  best  in  civilized  life  would 
be  swept  away  ;  many  of  its  noblest  influences, 
which  are  commonly  thought  of  as  far  removed 
from  contact  with  thoughts  of  money,  would  van- 
ish ;  much  of  the  breadth  of  view  and  the  tolera- 
tion of  spirit  that  comes  from  contact,  even  indirect 
and  remote,  with  other  peoples,  workers  in  other 
fields,  would  be  lost. 

The  monetary  system  of  a  country  reflects  its 
economic  progress.  The  system  of  exchange  is 
at  once  a  cause  and  a  consequence  of  the  stage 
of  economic  development.  With  every  change  in 
the  form  of  industrial  life  has  come  a  change  in 
the  system  of  exchange.  "  Corresponding  to  the 
changes  in  productive  methods  under  mechanical 
machinery  we  should  find  the  rapid  growth  of  a 

1  "  Principles  of  Political  Economy,"  III.,  vii.,  3. 


THE    SOCIAL    IMPORTANCE    OF    MONEY 

complex  monetary  system  reflecting  in  its  inter- 
national and  national  character,  in  its  elaborate 
structure  of  credit,  the  leading  characteristics 
which  we  find  in  modern  productive  and  distribu- 
tive industry.  The  whole  industrial  movement 
might  be  regarded  from  the  financial  or  monetary 
point  of  view."  1 

2.  Adaptation  of  the  Monetary  System  to  the 
Prevailing  Stage  of  Economic  Life.  —  The  forms  of 
money  and  the  whole  mechanism  of  exchange  at 
any  time  are  adapted  to  the  stage  of  industry  and 
trade,  and  to  the  scale  of  incomes  which  prevails 
at  the  time.  Where  trade  is  limited,  industry 
primitive,  and  market  values  low,  we  expect  to  find 
a  simple  and  inexpensive  money  and  a  simple 
mechanism  of  exchange,  with  the  credit  system 
but  little  developed.  Where  industry  and  trade 
are  highly  organized,  where  business  is  relatively 
complex  and  expensive,  and  the  scale  of  market 
values  and  of  incomes  high,  we  expect  to  find 
money  of  a  high  cost  of  production,  and  the  mech- 
anism of  exchange  correspondingly  complex  and 
costly.  His  arrow-heads,  his  bow,  and  the  skins 
of  the  beasts  he  kills,  are  the  natural  features  of 
the  system  of  exchange  in  the  simple  economic  life 
of  the  huntsman.  Gold,  in  the  form  of  a  highly 
finished  tool,  representative  paper  money,  and  the 
manifold  forms  of  a  credit  system,  widely  extended 
and  intricately  ramified,  are  the  equally  natural 
features  of  the  system  of  exchange  necessary  to 

1  Hobson,  "  Evolution  of  Modern  Capitalism,"  p.  7. 

3 


MONEY 

the  complex  relations  of  the  modern  business 
world.  The  people  of  a  country  with  little  capital 
endeavor  to  economize  that  little  by  stretching  their 
credit.  Unable  or  unwilling  to  sink  labor  and 
goods  in  the  production  of  a  material  money,  they 
seek  to  carry  on  their  exchanges  by  means  of  its 
paper  representatives.  A  rich  commercial  country, 
with  abundance  of  capital  to  spare  for  use  as 
money,  provides  itself  with  a  plentiful  supply  of 
metallic  money  and  rests  easily  and  without  strain, 
upon  the  basis  so  provided,  a  complex  system  of 
credit  exchanges  that  reaches  every  market  of  the 
world.  In  short,  the  stage  of  development  of  their 
system  of  exchange  is  a  measure  of  the  industrial 
development  of  a  people. 

3.  Relation  of  the  Monetary  System  to  the  Scale 
of  Incomes.  —  More  particularly,  the  standard  of 
living  of  a  community  is  disclosed,  more  or  less 
accurately,  by  the  kind  and  denominations  of  the 
money  it  uses.  Since  expenditures  depend  on  the 
scale  of  incomes,  small  incomes  imply  small  pur- 
chases ;  small  purchases  require  small  denomina- 
tions and  a  cheap  money  material.  If  goods  to 
the  value  of  ten  cents  a  day  represent  the  pur- 
chases necessary  to  the  daily  living  of  the  larger 
number  of  the  people  of  a  country,  the  unit  of 
money  commonly  in  their  thoughts  is  the  cent.  If, 
on  the  contrary,  the  usual  expenditure  of  a  majority 
of  the  people  is  a  dollar  and  a  half  or  two  dollars 
a  day,  they  think  in  dollars  rather  than  in  cents. 
To  millions  of  Chinamen,  cash,  representing  a 

4 


THE    SOCIAL    IMPORTANCE    OF    MONEY 

fraction  of  a  cent,  is  the  unit  of  purchases  for  a 
day.  To  an  American  the  dollar  is  the  familiar 
unit  of  account.  The  difference  in  the  value  of 
the  two  units  indicates,  at  least  roughly,  the  differ- 
ence in  the  scale  of  expenditure,  and,  therefore,  of 
the  standards  of  consumption,  of  the  two  peoples. 
4.  Division  of  Labor  and  the  Monetary  System.  — 
Further,  it  is  a  commonplace  remark  that  the 
modern  system  of  production  depends  upon  the 
extent  to  which  the  division  of  labor  can  be  car- 
ried ;  but  the  extent  to  which  this  division  can  be 
carried  is  greatly  increased  by  an  easily  working 
system  of  exchange,  since  the  size  of  the  market 
depends  largely  on  the  facility  of  exchange  of 
products.  The  remark  holds  as  well  for  the  divi- 
sion of  labor  between  different  countries  as  be- 
tween different  localities  within  a  country.  In 
other  words,  money  is  necessary  to  large  interna- 
tional trade.  Without  some  system  of  exchange 
each  country  would  have  to  provide  for  itself  all 
that  it  needed  to  consume.  If  the  mechanism  of 
exchange,  especially  the  credit  portion  of  it,  were 
to  break  down,  the  trade  between  countries  would 
be  so  deranged  that  the  different  nations  of  the 
world  would  be  thrown  back  into  positions  of 
relative  economic  isolation,  such  as  characterized 
them  before  the  era  of  modern  civilization  began. 
While  it  is  very  far  from  being  true  that  Rome 
fell,  as  Sir  Archibald  Allison  has  said,  because  of 
a  growing  dearth  of  money,  yet  that  lack  un- 
doubtedly had  an  influence  in  checking  trade, 

5 


MONEY 

lowering  the  standard  of  living,  and  retarding  that 
free  intercourse  necessary  to  produce  the  com 
munity  of  interest,  without  which  no  country  of 
extended  territory  can  long  remain  intact. 

5.  The  Monetary  System  and  Political  and  Eco- 
nomic Freedom.  —  Money  has  undoubtedly  been  the 
means  of  promoting  freedom,  both  political  and 
industrial.  Sir  Henry  Maine  has  pointed  out  that 
social  progress  is  quickened  by  the  substitution  of 
contract  for  custom  in  the  dealings  of  men.  Cus- 
tom has  made  way  for  competition  and  status  for 
contract  in  the  domain  of  economic  exchange  as 
the  money  economy  has  extended,  and  has  left  the 
payer  of  taxes  and  tithes  and  rents,  as  well  as  the 
seller  of  goods,  freer  because  of  its  extension.  For 
contracts  are  more  readily  discharged,  and  there- 
fore more  widely  extended,  with  a  medium  of  pay- 
ment that  is  general  in  character  and  acceptability. 
One  of  the  most  striking  historical  illustrations  of 
the  impulse  which  a  money  exchange  gives  to 
social  and  political  improvement  is  found  in  the 
betterment  of  the  condition  of  the  serfs  in  the 
Middle  Ages  by  the  commutation  of  the  services 
due  their  overlords  into  money  payments.  "  So 
far  from  being  an  evil,  during  this  period  at  any 
rate,  the  extension  of  the  use  of  money  as  a 
medium  of  exchange  was  the  means  of  effecting 
great  social  reforms,  and  there  can  be  little  doubt 
that  progress  was  retarded  largely  by  a  deficiency  of 
the  precious  metals,  especially  the  dearth  of  silver."1 

1  Nicholson,  "  Money  and  Monetary  Problems,"  5th  ed.,  p.  17. 

6 


THE    SOCIAL    IMPORTANCE    OF    MONEY 

It  is  true,  too,  that  in  the  later  Middle  Ages  the 
growing  use  of  money  to  replace  exchange  by 
barter  made  it  easier  to  raise  revenue  for  purposes 
of  defence,  and  thus  strengthened  the  cities  and 
kings  in  their  struggles  with  the  feudal  aristocracy. 
As  the  revenue  needed  grew  larger,  and  increased 
taxes  were  in  consequence  imposed,  the  demand 
for  greater  freedom  and  for  a  larger  voice  in  the 
control  of  the  government  became  stronger,  so 
that  a  better  system  of  exchange  indirectly  in- 
creased personal  freedom.  Somewhat  similar  is 
the  influence  of  money  wages  and  rent  on  the  con- 
dition of  the  negro  in  the  South.  Of  the  economic 
classes  among  the  negroes,  Mr.  Du  Bois  paints 
darkly  the  life  of  the  "cropper"  and  the  "  metayer," 
and  remarks  that  "a  degree  above  these  we  may 
place  those  laborers  who  receive  money  wages  for 
their  work,"  while  "the  renters  for  fixed  money 
rentals  are  the  first  of  the  emerging  classes."  l 

A  later  instance  of  the  good  influence  of  the 
extended  use  of  money  in  promoting  economic 
freedom  is  found  in  laws  abolishing  the  truck 
system  and  requiring  that  wages  be  paid  in  money. 
Great  abuses  grew  up  in  England  and  in  certain 
parts  of  this  country  under  the  truck  system.  It 
was  not  only  that  those  who  lived  under  it  suffered 
loss  from  having  to  pay  unreasonably  high  prices, 
but,  worse,  that  they  were  not  free  to  buy  where 
and  as  they  pleased,  and  had  not  the  power,  which 
ready  money  gives,  of  seeking  an  economic  escape 

1  W.  E.  B.  UuBois,  "The  Souls  of  Black  Folk,"  p.  159. 

7 


MONEY 

from  their  hard  conditions.  Under  such  a  system 
the  man  who  is  politically  free  may  be  economically 
enslaved ;  and  the  person  who  is  economically  a 
serf  cannot  long  effectively  exercise  the  rights  of 
political  freedom. 

6.  The  Monetary  System  and  Nationality.  — 
The  modern  mechanism  of  exchange  exercises  an 
influence,  too,  for  the  promotion  of  national  unity. 
Money,  and  the  division  of  labor  and  exchange 
which  the  wide  use  of  money  implies,  destroyed 
the  self-sufficing  villages  of  English  economic 
history,  and  taught  their  people  the  advantages  of 
mutual  dependence  and  community  of  interests. 
The  industrial  and  commercial  unity  so  developed 
laid  the  foundation  for  an  intenser  common  na- 
tional feeling.  In  a  similar  way  international 
comity  is  promoted.  Like  the  system  of  trans- 
portation, the  mechanism  of  exchange  brings  the 
people  in  different  parts  of  the  world  into  closer 
touch  with  one  another.  The  interests  of  the 
people  of  different  countries  are  united,  and  the 
facility  with  which  the  transfer  of  capital  is  made 
in  these  days  is  doing  much  to  break  down  the 
industrial  isolation  that  custom  and  national 
prejudice  have  fostered  so  long.  The  influence 
which  the  system  of  exchange  exerts  in  bringing 
different  countries  closer  together  would  be  greatly 
increased  by  the  adoption  of  a  uniform  coinage 
system  throughout  the  civilized  world,  or  at  least 
by  the  great  commercial  countries. 

The  adoption  of  a  common  monetary  system  by 
8 


THE    SOCIAL    IMPORTANCE    OF    MONEY 

the  great  nations  of  the  earth  has  been  prevented 
partly  by  national  prejudice,  and  partly  by  the  in- 
convenience involved  in  making  the  change.  Each 
nation  is  unwilling  to  give  up  its  own  system,  and 
is  ready  to  consent  to  the  adoption  of  a  common 
coinage  only  if  its  monetary  unit  be  made  the  com- 
mon one.  Moreover,  each  country  is  anxious  to  get 
whatever  advantage  in  trade  is  brought  by  the  use 
of  its  coins  in  other  countries.  There  is  a  feeling 
that  German  or  English  trade,  for  example,  will  be 
promoted  in  the  Orient  by  the  use  of  the  German 
or  the  English  coins.  While  there  is  some  force 
in  these  contentions,  the  benefits  that  would  accrue 
from  a  unification  of  the  world's  monetary  system 
would  far  outweigh  any  detriment  that  might  come 
to  particular  countries. 

7.  The  Monetary  System  and  Economic  Prosper- 
ity.—  The  modern  system  of  exchange  promotes 
industry  and  trade  by  making  the  aggregation 
of  capital  easier.  It  enables  people  to  turn  their 
savings  into  money  and,  by  depositing  it  in  savings 
institutions,  or  by  purchasing  the  shares  of  corpora- 
tions, to  concentrate  under  the  direction  of  com- 
petent men  the  large  capital  necessary  to  the  great 
enterprises  of  the  present  day.  Still  more,  the 
modern  monetary  system  facilitates  the  transfer  as 
well  as  the  aggregation  of  capital.  Money  is  the 
most  general  form  of  capital,  capital  in  the  fluid 
state,  so  that  it  can  be  immediately  turned  to  new 
enterprises  and  transferred  for  investment  to  dis- 
tant places.  Without  this  fluidity,  investments 

9 


MONEY 

would  necessarily  be  more  local  in  their  character 
and  the  industrial  possibilities  of  distant  places  in 
need  of  capital  could  not  be  so  readily  developed. 

The  monetary  system  indirectly  increases  the 
total  utilities  available  for  consumption  by  the  com- 
munity. If  a  community  effects  its  exchanges  by 
barter  alone,  it  does  so  at  a  certain  cost.  The  in- 
troduction of  money  exchange,  under  proper  con- 
ditions, will  lessen  that  cost  and  thereby  increase 
the  volume  of  goods  available  for  consumption. 
The  same  effect  is  produced  in  a  community  which 
already  makes  its  exchanges  with  money,  if  by  an 
increase  in  the  amount  of  money  exchanges  can  be 
effected  which  could  not  be  effected  before. 

Not  only  may  the  introduction  or  extension  of 
monetary  exchange  increase  the  net  consumption 
of  a  community,  by  decreasing  the  cost  of  making 
its  exchanges,  but  either  may  add  directly  to  the 
available  utilities.  For  in  a  regime  of  barter,  for 
example,  many  people  possess  things  which  have 
no  direct  use  to  them,  but  have  to  others.  As  soon 
as  this  is  found  out,  the  things  acquire  an  indirect 
importance  to  their  owners,  and  an  exchange  value. 

From  the  point  of  view  of  society  money  has,  of 
course,  no  superiority  over  other  kinds  of  goods. 
The  belief  was  once  common,  and  is  still  held  by  a 
good  many  people,  that  because  an  individual  is 
richer  the  more  money  he  has,  the  same  is  true  of 
a  country  as  a  whole.  But  this  is  not  so.  The 
money  can  be  used  by  the  country,  regarded  as  a 
whole,  only  to  do  its  domestic  business  or  to  buy 

10 


THE    SOCIAL    IMPORTANCE    OF    MONEY 

foreign  goods.  If  any  country  could  arbitrarily  in- 
crease her  amount  of  gold,  the  larger  quantity, 
generally  speaking,  would  simply  effect  the  same 
amount  of  exchanges  as  the  smaller  did,  but  on  a 
different  price  level.  As  a  matter  of  fact,  how- 
ever, an  excess  of  money  would  flow  abroad  for 
goods.  The  only  case  in  which  a  country  is  richer 
by  the  possession  of  gold  beyond  her  need  for  it 
for  purposes  of  payment  is  when  she  possesses  her 
own  mines.  For  then  she  can  send  her  surplus  gold 
abroad  in  exchange  for  other  goods,  and  she  becomes 
richer,  not  by  keeping  her  gold,  but  by  parting 
with  it.  A  country  is  no  better  off  from  having  a 
surplus  of  money  than  is  a  railroad  company  with 
more  locomotives  than  it  can  use  economically. 

8.  The  Monetary  System  and  the  Distribution  of 
Wealth.  —  On  the  other  hand,  the  monetary  system 
of  exchange  involves  disadvantages  which  appear 
to  some  minds  so  serious  as  to  offset  the  good  it 
does.  Some  people  believe,  for  example,  that 
money  produces  inequality  of  wealth.  There  is  a 
certain  plausibility  in  this  opinion.  For  the  pos- 
sessor of  money  has  a  certain  advantage  over 
holders  of  other  forms  of  wealth,  because  his 
goods  are  in  general  demand ;  while  the  owner  of 
other  forms  of  wealth,  if  he  wishes  to  exchange, 
must  search  for  a  purchaser  who  has  what  he 
wants  to  buy  and  is  willing  to  take  what  he  has  to 
offer.  This  fact  gives  the  owner  of  money  a  pecul- 
iar industrial  and  social  power,  a  kind  of  monopo- 
listic advantage.  It  may  be  said  in  opposition  to 

ii 


MONEY 

this  view,  that  the  same  advantage  lies  with  any 
one  who  happens  to  have  an  article  for  which  there 
is  a  strong  demand.  There  are  occasions  on  which 
the  possessor  of  wheat,  for  example,  has  an  advan- 
tage in  trade  over  the  man  who  has  money,  that 
is,  when  the  demand  for  wheat  is  strong  and  its 
supply  limited.  This,  however,  is  not  a  sufficient 
answer,  for  any  one  will  take  money  for  his  goods, 
but  not  every  one  cares  to  take  wheat  beyond  a  very 
limited  quantity,  if  at  all.  If  a  man  owns  a  house 
for  which  he  paid  $5000,  he  can  buy  other  things 
with  it  only  as  opportunity  offers.  If  he  has  $5000 
in  money,  he  can  buy  other  things  as  he  pleases. 
The  market  for  other  things  is  more  or  less  local ; 
that  for  money  is  universal.  There  is  always  a 
market  somewhere,  in  some  measure,  for  any  eco- 
nomic goods,  but  the  individual  who  has  any  kind 
of  goods  but  money  must  find  this  somewhere  and 
some  measure.  The  owner  of  money  needs  not  do 
so.  Nevertheless,  inequality  of  wealth  really  de- 
pends very  little  on  the  existence  of  money.  Such 
inequalities  were  never  greater  than  in  pastoral  and 
agricultural  states,  where  wealth  consisted  of  cattle 
and  land.  The  rich  are  not  rich  because  they  have 
large  quantities  of  money,  for  they  do  not  keep 
their  wealth  in  that  form ;  but  because  they  have 
acquired  a  legal  title  to  a  large  share  of  the  goods 
in  the  community. 

Another  disadvantage  of  the  monetary  system 
lies  in  the  disturbance  which  changes  in  the  value 
of  money  cause  in  the  distribution  of  incomes. 

12 


THE    SOCIAL    IMPORTANCE    OF    MONEY 

Money  is  the  vehicle  of  the  distribution  of  product, 
and  variations  in  its  value  between  the  times  of  re- 
ceiving income  and  spending  it,  may  change  the 
relation  of  the  distribution.  The  owner  of  money 
gains  or  loses,  when  he  purchases,  with  every 
change  in  its  value.  It  is  true  that  fluctuations  in 
the  value  of  money  may,  in  the  long  run,  offset  one 
another,  so  that  the  loss  of  to-day  becomes  the  gain 
of  to-morrow.  The  trouble  is  that  the  gain  is  not 
always  —  or  perhaps  seldom  —  made  by  the  same 
persons  who  experience  the  loss. 

9.  The  Socialistic  View  of  the  Monetary  Sys- 
tem. —  Notwithstanding  the  evils  which  the  use  of 
money  entails,  and  the  impossibility  of  removing  all 
of  them,  we  may  not  conclude,  with  the  socialist, 
that  money  and  the  monetary  system  could  be  dis- 
pensed with.  Even  if  the  socialist's  dream  could 
be  realized,  and  all  producers  should  turn  their 
products  into  a  common  fund  on  which  each  would 
draw  with  equal  right,  it  would  still  be  necessary  to 
have  some  evidence  of  these  rights  and  claims,  if 
only  checks  issued  by  the  government.  If  the 
owners  of  these  checks  accepted  them  from  one 
another,  instead  of  always  presenting  them  directly 
to  the  government  warehouse,  they  would  be,  to 
all  intents  and  purposes,  paper  money.  That  they 
would  thus  pass  current  in  the  absence  of  any  other 
medium  of  exchange  would  be  inevitable,  since  their 
currency  would  be  necessary  in  order  to  enable  each 
person  to  sell  his  own  product  for  other  things  in 
such  quantities  and  at  such  times  as  he  needed  them. 

'3 


CHAPTER  II 

THE  EVOLUTION  OF  MONEY 

REFERENCES  :  Babelon,  Les  Origines  de  la  Monnaie  ;  Biicher,  K., 
Industrial  Evolution,  pp.  67  ff. ;  Carlile,  W.  W.,  Evolution  of  Modern 
Money ;  Del  Mar,  A.,  History  of  the  World's  Monetary  Systems ; 
Jevons,  W.  S.,  Money  and  the  Mechanism  of  Exchange,  Ch.  4 ; 
Laveleye,  E.  de,  La  Monnaie  et  le  Bimetallisme  International,  Ch.  I  ; 
Lenormant,  P.,  La  Monnaie  dans  antiquite ;  Menger,  K.,  On  the 
Origin  of  Money,  Econ.  Journ.,  1892,  pp.  239-255  ;  White,  H., 
Money  and  Banking,  pp.  12-14. 

1.  The  Conjectural  Character  of  Early  Monetary 
History.  —  There  is  a  perennial  interest  in  the  life 
of  early  man.  His  habits,  the  instruments  he  used, 
and  his  ways  of  doing  things  have  always  been 
subjects  of  curious  inquiry  on  the  part  of  the  anti- 
quarian and  historian.  We  rake  over  the  refuse 
heaps  of  past  generations  to  find  the  kind  of  tools 
with  which  they  worked ;  and  use  the  known  re- 
mains of  a  lost  language  to  reconstruct  the  religious 
beliefs  and  social  customs  of  the  people  who  spoke 
it.  While  many  of  the  conclusions  resulting  from 
these  inquiries  rest  upon  a  substantial  basis  of  fact, 
there  are  some  that  can  be  classed  only  as  conjec- 
tures. But  when  these  conjectures  are  plausible, 
they  are  likely  to  be  accepted  as  correct  explana- 
tions of  the  conditions  they  attempt  to  describe  long 

14 


THE    EVOLUTION    OF    MONEY 

after  their  origin  and  character  has  been  forgotten, 
and  by  people  to  whom  it  was  never  known. 

There  is  no  phase  of  the  history  of  early  institu- 
tions to  which  these  remarks  are  more  applicable 
than  to  money.  The  generally  accepted  explana- 
tion of  the  origin  and  development  of  the  system 
of  exchange  is  largely  conjectural.  It  found  its 
beginning  in  the  a  priori  conceptions  of  Aristotle. 
It  seems  evident  enough  that  the  writer  who  would 
attempt  to  give  the  correct  explanation  of  the  early 
history  of  money  should  have  at  hand  considerable 
information  about  life  in  primitive  communities ; 
but  neither  Aristotle  nor  his  contemporaries  had 
sufficient  information  on  this  subject  to  justify  us 
in  thinking  that  he  or  they  could  frame  an  expla- 
nation of  money  that  we  could  accept  as  historically 
correct.  It  savors,  doubtless,  of  economic  heresy 
to  say  it,  yet  nothing  can  be  clearer  than  that 
Aristotle's  explanation  of  the  origin  of  money  is 
pure  conjecture,  and  is  a  corollary  of  his  distinc- 
tion between  what  he  calls  the  natural  and  the 
conventional  modes  of  acquiring  property.  Speak- 
ing of  buying  and  selling,  he  says :  "  The  other 
or  more  complex  form  of  exchange  grew  out  of 
the  simpler  [or  barter].  When  the  inhabitants 
of  one  country  became  more  dependent  on  those  of 
another,  and  they  imported  what  they  needed  and 
exported  the  surplus,  money  necessarily  came  into 
use.  .  .  .  Hence  men  agreed  to  employ,  in  their 
dealings  with  each  other,  something  which  was 
intrinsically  useful  and  easily  applicable  to  the 


MONEY 

purposes  of  life,  for  example,  iron,  silver,  and  the 
like."  1 

In  this  passage,  especially  in  the  last  sentence, 
we  have  clearly  set  forth  the  theory  which  has 
been  accepted  throughout  the  centuries  as  describ- 
ing an  actual  historical  evolution,  but  is  nothing 
more  than  Aristotle's  guess  of  what  probably  oc- 
curred. Being  plausible  and  at  the  same  time 
Aristotelian,  it  has  come  down  to  us  through  gen- 
erations of  writers,  with  scarcely  any  modification. 
We  find  Paulus,  for  example,  saying  that  "  a  sub- 
stance was  chosen  which,  from  its  permanent  and 
universal  value,  might  become  the  medium  of  ex- 
change, and  obviate  the  difficulties  constantly  aris- 
ing in  the  system  of  barter."  2  It  is  clear  that  for 
this  passage  the  Roman  lawyer  is  the  debtor  of  the 
Greek  philosopher. 

Not  only  is  the  common  theory  of  the  origin  of 
money  conjectural,  but  so,  too,  are  some  of  the 
explanations  of  the  development  of  the  system  of 
exchange.  Hildebrand  and  others  have  told  us, 
for  example,  that  the  regime  of  barter  was  dis- 
placed with  one  of  money,  and  that  this  in  turn 
will  in  time  give  place  to  a  system  of  exchange  by 
means  of  credit.  We  are  told  that  the  extent  of 
the  use  of  credit  in  a  given  country  may  be  looked 
upon  as  a  test  of  its  civilization  ;  that  as  a  country 
becomes  more  highly  civilized  it  discards  barter 
and  diminishes  its  use  of  money.  The  pertinacity 

1  "  Politics,"  I.,  9,  7.     Jowett's  ed. 

2  Digest  XVIII.,  p.  I.     Quoted  by  Lenormant  in  Cont.  Rev.,  p.  34. 

16 


THE    EVOLUTION    OF    MONEY 

of  this  theory,  which  has  been  held  by  not  a  few,  is 
probably  due  in  part  to  its  simplicity,  and  by  its 
show  of  conformity  to  what  is  called  evolution.  It 
is  too  great  a  strain  on  one's  credulity  to  believe 
that  primitive  man  had  as  much  knowledge  of 
trade  as  is  imputed  to  him  in  Gossen's  theory  that 
money  and  exchange  presuppose  a  knowledge  of 
the  advantage  of  exchange  in  reducing  cost  of  pro- 
duction. But  such  explanations  of  the  origin  and 
development  of  the  system  of  exchange  assume 
too  much  knowledge  of  trade  and  too  accurate 
foresight  on  the  part  of  primitive  man,  and  a 
course  of  development  that  is  too  simple  and  too 
clean-cut.  The  explanation  of  our  social  progress 
would  be  beautifully  easy  if  we  could  assume  that 
every  old  habit  and  institution  was  to  be  consigned 
to  the  limbo  of  the  forgotten  and  unused  as  soon 
as  some  new  means  of  performing  its  work  were 
discovered ;  and  that  we  could  always  select  in  ad- 
vance an  improved  means  of  accomplishing  our 
purpose. 

2.  The  Character  of  Monetary  Evolution. — Yet 
criticism  of  such  theories  must  not  be  severe,  for 
the  temptation  to  interpret  the  past  by  the  present 
and  to  attribute  to  other  people  motives  and  knowl- 
edge that  are  our  own,  is  a  pitfall  that  few  writers 
succeed  in  escaping.  The  first  use  of  money  did 
not  arise  from  any  agreement  among  men,  nor  has 
the  evolution  of  our  system  of  exchange  been  one 
of  successive  displacements  of  one  means  of  ex- 
change by  another.  Like  other  institutions,  both 
c  17 


MONEY 

are  slow  and  unconscious  growths  from  conditions 
and  actions  which  existed,  in  germ  at  least,  in  very 
early  times.  For  all  three  methods  of  trading 
known  to  the  modern  world  —  barter,  money,  and 
credit  —  were  present  in  societies  of  more  or  less 
primitive  civilization.  Some  early  peoples  traded 
only  by  means  of  barter,  while  others  used  barter 
and  money,  or  barter  and  credit,  or  all  three  means ; 
and  no  society  has  abandoned  one  means  of  ex- 
change because  it  resorted  to  another.  Illustrations 
of  these  facts  may  be  found  in  some  of  the  data  col- 
lected by  Herbert  Spencer.1  Among  the  ancient 
Mexicans,  for  example,  trade  was  carried  on  by  both 
barter  and  money.  The  money  system  in  use  was 
what  may  be  called  a  poly-commodity  system,  and 
comprised  five  articles :  cocoa  beans,  small  cotton 
cloths,  gold  dust  in  goose  quills,  copper,  and  tin. 
The  Shillooks,  a  Nigritian  tribe  on  the  White  Nile, 
are  said  to  have  made  contracts  valid  for  one 
month.2  Among  the  inhabitants  of  Yucatan  there 
was  an  active  trade  by  means  of  a  similar  money 
system,  and  goods  were  sold  on  credit,  without 
interest ;  while  among  another  South  American 
people,  the  Chibchaws,  interest  was  charged. 
Among  the  Bondas,  a  tribe  of  lower  Guinea, 
strings  of  beads  and  cowry  shells  were  the  media  of 
exchange,  while  the  ordinary  media  of  the  Fuegians 
consisted  of  small  pieces  of  damoor  cloth,  tin  rings, 

1  "  Data  of  Sociology." 

2  Featherman,  "  Social  History  of  the  Races  of  Mankind,"  Vol.  I., 
pp.  66,  410,  424,  731,  735  ;   Vol.  V.,  p.  601. 

18 


THE    EVOLUTION    OF    MONEY 

slaves,  and  glass  beads.  Such  cases  show  clearly 
that  the  evolution  of  the  system  of  exchange  has 
not  been  everywhere  along  a  single  line.  In  some 
cases  it  was  from  barter  to  money,  or  money  and 
credit ;  but  in  others,  credit  seems  to  be  found  as 
early  as  barter,  and  not  infrequently  more  than  one 
kind  of  money  was  used  by  primitive  peoples.  If, 
now,  it  be  true  that  all  the  phases  of  the  existing 
mechanism  of  exchange  were  recognized  in  more 
primitive  societies,  in  what  sense  can  we  properly 
say  that  there  has  been  an  evolution  in  the  system 
of  exchange  ?  In  this  sense  :  barter,  the  use  of 
money  in  each  single  exchange,  deferred  money 
payments,  and  cancellation  of  indebtedness  by 
credit  paper,  while  used  in  all  stages  of  social 
development,  are  used  in  different  combinations, 
with  different  emphasis  on  the  different  members 
of  the  series  among  different  peoples  at  the  various 
stages  of  their  civilization.  It  is  a  case  of  evolution 
in  which  all  the  organs  are  present,  even  in  the 
most  rudimentary  form  of  the  organism ;  but  dif- 
ferent organs  and  different  groups  of  organs  have 
been  developed  by  different  descendants  of  the 
original  organism  because  they  have  lived  under 
different  conditions.  The  conditions  of  their  in- 
dustrial life  have  determined  whether,  among  a 
given  people,  barter,  or  money,  or  credit,  should 
be  the  most  prominent  feature  of  their  system  of 
exchange. 

3.    The   First  Service   of   the   Money  Article.  — 
The  use  of  an  article,  or  articles,  as  intermediate 

19 


MONEY 

goods  implies  that  it  performs  the  two  services  of 
promoting  exchange  and  expressing  value.  There 
has  been  a  good  deal  of  discussion  of  the  question 
which  of  these  services  was  first  recognized.  Was 
the  first  use  of  an  article  as  money  due  to  the  need 
for  a  means  of  exchange,  or  to  that  for  a  common 
measure  of  value  ?  Each  view  has  its  advocates, 
but  the  question  is  not  of  much  importance,  and 
has  but  little  interest  for  the  economist.  Some 
insist  that  the  idea  of  facilitating  exchange  must 
have  followed  the  use  of  the  money  commodity 
for  comparing  values ;  others,  that  the  concep- 
tion of  a  measure  of  value  is  necessarily  in- 
volved in  that  of  a  medium  of  exchange.  As 
Professor  Bonamy  Price  puts  the  matter :  "  The 
savages  who  first  took  to  cowry  shells  would 
hardly  be  up  to  such  a  thought  as  comparing 
goods  with  one  another.  The  given  measure  was 
the  consequence,  not  the  motive,  of  the  use  of 
money."  This  hardly  seems  the  reasonable  view, 
for  we  cannot  believe  that  a  comparison  of  values 
did  not  take  place,  even  in  the  earliest  use  of  a 
medium  of  exchange.  Rational  beings,  even 
though  savages,  would  hardly  exchange  their 
goods  without  reference  to  their  value.  The  fact 
that  the  money  was  itself  an  article  of  consump- 
tion is  sufficient  proof  of  this  view. 

4.  The  Selection  of  the  Money  Commodity.  —  Of 
more  importance  than  the  question  which  service 
of  money  was  first  recognized,  is  the  inquiry  : 
What  causes  led  to  the  gradual  narrowing  of  the 

20 


THE    EVOLUTION    OF    MONEY 

circle  of  things  used  as  money  and  the  final  set- 
tling upon  one  or  two  ?  In  other  words,  what  were 
the  characteristics  of  the  things  most  suitable  for 
the  purpose  ?  Here  again  we  are  tempted  to  im- 
pute conscious  choice  to  early  man.  We  write  or 
speak  of  his  choosing  this  or  that  article  as  the 
exchange  medium.  But  this  cannot  be  the  correct 
description  of  the  facts.  The  result  was  reached 
unpurposively.  The  thing  which  was  fittest  at  the 
time  to  serve  as  a  medium  of  exchange,  became 
the  medium ;  but  fittest  can  mean  only  that  which 
caused  less  inconvenience  than  other  things 
which  were  used  for  the  same  purpose.  The 
reduction  of  the  number  of  things  used  as  money 
came  from  noticing  the  wider  acceptance  of  some 
as  compared  with  others.  That  commodity  for 
which  the  demand  was  most  general  established 
itself,  without  previous  reasoning,  on  the  part  of 
its  users.  Among  the  multitude  of  things  which 
men  exchanged  there  must  always  have  been 
some  which,  from  whatever  cause,  were  more 
readily  or  more  generally  sought  than  others.  It 
was  doubtless  soon  seen  that  these  articles  were 
the  best  ones  for  a  person  to  get  if  he  sold  his 
goods  at  a  time  when  he  did  not  want  things  for 
immediate  consumption.  For  the  articles  in  most 
general  demand  would  be  most  easily  exchanged 
later  on  for  others,  and  therefore  came  to  be 
looked  on  more  or  less  as  intermediate  goods.  In 
time  this  circle  of  articles  became  narrower  by  a 
process  of  unconscious  selection  as  experience 

21 


MONEY 

showed  which  of  them  best  served  the  purpose 
of  a  commodity  go-between  in  trade.  Their 
character  as  consumption  goods  became  relatively 
less  important,  and  their  character  as  intermediate 
goods  more  so.  If  this  process  of  selection  could 
be  carried  to  its  logical  conclusion,  it  would  result 
in  rinding  for  use  as  money  an  article  which  could 
not  serve  any  purpose  of  direct  consumption. 
The  nearest  approach  to  such  a  money  is  bank  or 
government  paper  money.  Moreover,  that  article 
which  by  its  natural  divisions  was  best  suited  to 
the  prevailing  range  of  values,  was  doubtless 
found  to  be  more  convenient  than  any  other.  It 
is  very  likely  that  these  two  attributes,  general 
acceptability  and  convenient  subdivision,  were  the 
qualities  that  had  most  to  do  with  the  final  deter- 
mination of  the  medium  of  exchange. 

5.  Kind  of  Article  Selected.  —  The  article  which, 
in  early  times,  was  generally  acceptable  was  not 
always  the  same.  Sometimes  it  was  a  necessary 
of  life,  sometimes  an  ornament.  Articles  which 
served  the  latter  purpose  were  likely  to  be  ac- 
cepted over  a  wider  area,  but  the  generalness  of 
the  acceptability  of  a  particular  thing  depended 
mainly  on  the  stage  of  economic  life  a  community 
had  reached.  Skins  and  furs  were  always  in 
demand  in  a  community  of  hunters,  cattle  in  one 
of  shepherds,  dates  in  a  date  country,  and  wam- 
pum beads,  or  cowry  shells,  or  gold,  where  these 
were  highly  valued  for  personal  adornment.  As 
soon  as  it  was  recognized  by  all  the  people  in  a 

22 


THE    EVOLUTION    OF    MONEY 

community  that  a  certain  article  could  be  sold  at 
any  time,  it  became  the  medium  of  exchange,  the 
money  of  that  community.  The  article  thus  took 
on  a  new  function.  Instead  of  being  simply  a 
thing  for  direct  consumption,  it  became  in  addi- 
tion an  instrumental  good,  a  means  of  facilitating 
exchanges  and  measuring  values.  There  was  an 
added  demand  for  it,  and  it  therefore  took  on  a 
higher  exchange  power. 

6.  Subdivision  of  the  Money  Article.  —  But  money, 
chosen  from  such  commodities  as  men  in  a  low 
industrial  society  had  at  their  disposal,  had  incon- 
veniences of  its  own.  Some  people  probably 
could  not  get  an  article  which  was  at  the  same 
time  in  general  demand  and  capable  of  convenient 
division.  This  difficulty  seems  to  have  been  met 
by  the  early  use  of  what  may  be  called  represen- 
tative money.  We  know  that  the  early  Greek 
coins  were  stamped  with  the  figure  of  an  ox,  and 
the  early  Chinese  with  that  of  a  shirt.1  One  form 
of  early  Russian  money  consisted  of  small  pieces 
of  definite  shapes  cut  from  the  skins  of  animals 
and  passed  from  hand  to  hand  as  tokens  of  owner- 
ship of  the  whole  skins.  The  ox,  the  shirt,  the 
skin,  were  each  too  heavy  or  too  large  to  pass 
about.  A  piece  of  metal  shaped  like  the  horse  or 
the  shirt,  or  a  disk  with  pictures  of  these  stamped 
on  it,  or  a  piece  of  skin  shaped  so  that  it  would 
fit  a  hole  in  a  certain  complete  skin,  all  obviously 

1  Dean,  "  History  of  Civilization,"  Vol.  II.,  p.  76  ;  Xintteenth 
Cent.  Mag.,  Vol.  VI.,  p.  789. 

21 


MONEY 

mean  that  they  entitled  the  receiver  to  expect 
goods  of  a  value  equivalent  to  that  of  the  horse, 
or  the  ox,  or  the  shirt.  The  value  of  the  metal 
itself  was,  perhaps,  not  prominent  in  the  minds 
of  the  exchangers  at  first,  so  that  the  money  was 
representative.  Not  for  some  time  was  the  value 
of  the  money  thing  taken  for  the  measure  of  the 
value  of  the  goods  it  bought. 

Experience  taught  men  in  time  that  the  metals, 
of  one  kind  or  another,  served  as  a  medium  of 
exchange  better  than  anything  else  that  had  been 
tried.  For  the  metals,  as  Menger  says,  possess 
in  higher  degree  than  any  other  article  the  attri- 
bute of  universal  salableness.  As  the  standard  of 
life  rose  and  the  range  of  prices  became  higher, 
a  more  valuable  unit  was  needed,  and  this  need 
gradually  led  to  the  use  of  the  most  valuable 
metal  available.  Curiously  enough,  when  the 
stage  was  reached  where  the  most  valuable  came 
into  use,  it  was  found  necessary  to  return  to  what 
has  been  called  the  poly-commodity  system. 
The  most  valuable  metal  was  not  divisible  into 
convenient  units  of  small  enough  value  to  suit  the 
scale  of  prices  and  the  range  of  incomes.  So 
modern  man  uses  gold  for  his  larger  payments 
and  more  valuable  exchanges,  and  one  or  two,  or 
more,  other  articles  for  payments  of  value  too 
small  to  admit  of  the  use  of  the  dearest  metal. 

7.  Influence  of  the  Market  on  the  Evolution  of 
Money.—  The  principal  influence  in  the  evolution 
of  the  money  commodity  was,  of  course,  the  growth 

24 


THE    EVOLUTION    OF    MONEY 

of  trade  in  volume  and  complexity.  Indeed,  it 
may  be  said  that  the  development  of  the  money 
system  depended  entirely  on  the  development  of 
the  market.  Barter  was  the  earliest  form  of  trade, 
because  it  is  the  form  peculiarly  suited  to  that 
stage  of  trade  in  which  exchanges  were  few,  local, 
and  between  individuals  who  wanted  articles  for 
direct  personal  use.  In  time,  trade  between  indi- 
viduals gave  place  to  local  markets  on  the  border- 
land between  tribes,  and  these  markets,  in  some 
cases,  became  regular  established  fairs,  in  which 
the  traders  found  profit  by  bringing  the  products 
of  different  localities  to  these  centres  of  trade. 
This  class  it  was  whose  experiences  of  the  incon- 
veniences of  barter,  and  of  the  use  of  several 
things  as  money  at  the  same  time,  gradually  led 
to  the  various  steps  of  progress  that  have  been 
briefly  described.  So  long  as  there  was  no  sepa- 
rate trading  class  and  no  market  in  the  commu- 
nity, individuals  could  as  well  as  not  use  any  one  of 
a  variety  of  goods  to  pay  for  their  purchases.  In 
local  markets  the  adaptation  of  the  single  money 
medium  would  be  a  matter  of  great  convenience, 
and  in  trade  between  different  communities  it 
would  be  almost  a  necessity. 

8.  The  Complex  Character  of  the  Mechanism  of 
Exchange.  —  We  have  seen  that  barter  and  credit, 
as  well  as  money,  are  found  as  means  of  exchange 
in  communities  of  a  low  degree  of  civilization,  so 
that  we  cannot  accept  Hildebrand's  cut-and-dried 
theory  of  simple  steps  from  one  to  another  of  the 

25 


MONEY 

three  means.  Of  course  the  credit  methods  used 
in  undeveloped  communities  were  of  a  very  simple 
character.  We  cannot  in  any  case  speak  correctly 
of  the  existence  of  a  credit  system  in  such  cases. 
So  far  as  credit  was  used  at  all,  it  assumed  the 
form  of  debt  between  individuals  with  direct  per- 
sonal payment  by  debtor  to  creditor.  Cancellation 
of  indebtedness  was  unknown,  for  the  clearing  sys- 
tem, even  in  its  simplest  form,  belongs  to  a  com- 
paratively higher  stage  of  civilization.  The  sphere 
of  barter  in  the  modern  world  is  still  somewhat  ex- 
tensive. In  the  country  districts  of  even  the  most 
highly  civilized  countries  the  farmer  still  brings 
his  produce  to  the  country  storekeeper  to  exchange 
it  for  what  he  needs,  and  the  world  is  far  from  hav- 
ing abandoned  the  payment  of  labor  in  kind.  But 
as  the  different  countries  become  more  thickly  set- 
tled, and  society  becomes  more  integrated,  we  may 
look  for  still  greater  restrictions  of  the  sphere  of 
direct  barter.  Perhaps  in  the  far  future  barter 
will  cease  to  be  important  as  compared  with  the 
total  trade  of  the  world.  But  here,  as  in  many 
other  cases,  the  simple  method  discovered  by  the 
world  in  its  infancy  will  always  prove  serviceable, 
and  perhaps  necessary,  to  the  world  in  its  maturity. 
It  is  the  simple  which  is  universal. 


26 


CHAPTER  III 

COINAGE 

REFERENCES  :  Evans,  G.  G.,  History  of  the  United  States  Mint 
and  Coinage  ;  Hepburn,  A.  B.,  History  of  Coinage  and  Currency 
in  the  United  States,  Pt.  I.,  Chs.  I,  2,  3  ;  Jevons,  W.  S.,  Money  and 
the  Mechanism  of  Exchange,  Ch.  7 ;  Knies,  K.,  Das  Geld,  2d  ed., 
pp.  192-210;  Laughlin,  J.  L.,  Principles  of  Money,  Ch.  2;  Liver- 
pool, Lord,  Treatise  of  the  Coins  of  the  Realm ;  Muhleman,  M., 
Monetary  Systems  of  the  World ;  Nicholson,  J.  S.,  Money  and 
Monetary  Problems,  Pt.  I.,  Ch.  3  ;  Norman,  J.  H.,  The  World's  Metal 
Monetary  Systems,  pp.  8,  12,  45  ;  Ridgeway,  W.,  Origin  of  Metallic 
Currency  and  Weight  Standards  ;  Scott,  W.  A.,  Money  and  Banking, 
Ch.  5  ;  Watson,  D.  K.,  History  of  American  Coinage  ;  White,  H., 
Money  and  Banking,  2d  ed.,  Ch.  2. 

1.    Natural   Objects  as   Monetary  Units. —  Man 

naturally  turned  for  his  first  money  to  something 
ready  to  his  hand.  The  earliest  forms  of  the 
medium  of  exchange  were,  therefore,  natural  ob- 
jects, and  the  diversity  of  the  things  used  for  the 
purpose  by  different  peoples  is  almost  as  great  as 
that  of  the  portable  natural  objects  available.  It 
was  necessary,  however,  to  find  articles  whose 
units  were  of  as  nearly  equal  purchasing  power  as 
possible,  and  also  capable  of  subdivision  to  make 
purchases  of  different  amounts.  The  first  of  these 
needs  gradually  led  to  the  selection  of  natural 

27 


MONEY 

objects  which  were  approximately  uniform  in  size, 
shape,  and  color.  The  need  for  money  units  of  dif- 
ferent purchasing  power  led  sometimes  to  the  use 
of  different  articles  to  furnish  the  necessary  de- 
nominations. An  ox,  a  cow,  a  sheep,  would,  for 
instance,  be  one  gradation ;  and  a  buffalo  skin, 
a  beaver  skin,  a  wolf's  skin,  another.  For  it  was 
impossible  to  divide,  for  example,  a  beaver's  skin, 
or  an  ox,  or  a  shell,  into  parts  to  suit  the  amounts 
of  different  transactions.  The  division  would  have 
destroyed  their  value  and  their  availability  as 
money  altogether.  Sometimes,  however,  the  diffi- 
culty was  met  by  using  an  article,  different  grades 
of  which  were  available.  For  instance,  different 
sizes  or  colors  of  cowry  shells,  or  of  wampum  beads, 
formed  a  scale  of  related  values  and  served  roughly 
the  purpose  of  coins  of  denominations.  In  colo- 
nial times,  in  New  England,  the  black  wampum 
beads  had  a  higher  purchasing  power  than  the 
white  ones. 

2.  The  Nature  and  Purpose  of  Coinage.  —  In 
time,  of  course,  men  undertook  to  meet  the  need 
for  uniform  and  graded  pieces  of  money  by  artifi- 
cial methods.  When  they  came  to  use  a  money 
substance  capable  of  such  manipulation,  they  made 
it  into  pieces  to  suit  their  purpose.  This  process 
of  giving  uniformity  and  thereby  at  the  same  time 
recognizability  to  money  constitutes  coinage  in  the 
widest  sense  of  that  word.  According  to  Walker, 
the  word  may  be  defined  as  any  method  "  of  de- 
termining, for  easy  popular  recognition,  the  quantity 

28 


COINAGE 

and  quality  of  individual  portions  of  that  which  has 
been  adopted  into  use  as  money."  l 

But  this  definition  is  too  broad.  As  it  stands,  it 
would  include  all  kinds  of  money,  of  whatever 
material,  whose  character  was  indicated  by  a  de- 
vice of  any  kind,  whether  stamped,  printed,  or  en- 
graved. By  the  word  "  coinage  "  is  now  commonly 
meant  the  stamping  of  a  piece  of  the  metal  for  use 
as  money  so  as  to  make  known  its  denomination 
and  value  directly,  or  by  indicating  its  weight  and 
fineness. 

3.  The  Evolution  of  Coinage.  —  It  is  not, difficult 
to  trace  in  a  general  way  the  steps  in  the  evolution 
of  coinage.  The  first  effort  was  to  give  definite 
shape  or  size  or  weight  to  articles  which  were  by 
nature  uniform  in  their  physical  character.  The 
cowry  shells  of  the  African  negro,  the  wampum 
beads  or  shells  of  the  North  American  Indian,  the 
Abyssinians'  cubes  of  salt,  the  Mexicans'  quills,  full 
of  gold  dust,  square  pieces  of  leather,  and  similar 
articles,  all  illustrate  this  effort.  Nature  furnished 
the  homogeneity  and  cognizability  which  were 
necessary  to  make  convenient  money,  and  man 
gave  shape  to  the  articles. 

The  trick  once  learned  was  applied,  in  various 
ways,  to  all  articles  that  successively  came  into  use. 
When  metal  became  the  medium,  it  was  made  into 
wedges,  "spikes,  or  small  obelisks."  Indeed,  the 
word  "  coin  "  is  derived  from  the  Latin  cuncus,  a 
wedge,  and  originally  meant  a  piece  of  metal  so 

1  "  Money,"  p.  164. 
29 


MONEY 

shaped.  The  modern  representative  of  these  spikes 
or  obelisks  is  the  bars  which  are  used  in  making 
international  money  payments.  Bars,  it  has  been 
found,  lose  less  by  abrasion  than  coin,  and  hence 
are  preferred  for  shipment. 

It  is  not  clear  how  ring  money  came  unto  use  ; 
but  it  may  be  that  the  easy  bending  of  a  thin  spike 
into  the  handier  form  of  a  ring  led  to  the  change. 
In  time  the  ring  form  suggested  the  plan  of  mak- 
ing metal  disks  with  holes  punched  in  them,  prob- 
ably for  ease  in  carrying.  The  Chinese  cash  are  of 
this  form. 

The  transition  from  plain  bars  or  disks,  to  bars 
or  disks  marked  for  recognition  or  guarantee,  must 
have  come  early  in  monetary  history  ;  but  the  manu- 
facture of  stamped  disks  of  the  modern  sort  was 
a  comparatively  late  development.1  In  the  early 
days  of  the  stamped  coin  only  one  side  of  the  disk 
was  marked  ;  but  the  presence  of  an  unmarked  face 
caused  loss  because  it  tempted  dishonest  people  to 
rub  off  or  file  off  a  portion  of  the  metal.  To  pre- 
vent this,  in  time  both  sides  were  stamped,  and  at 
last,  in  order  to  check  the  dishonesty  wholly,  the 
edges  were  milled,  and  thus  we  come  to  the  coin  of 
our  own  days,  the  mechanical  technique  of  which 
leaves  little  to  be  desired. 

Coins  have  been  made  at  different  times  of  nearly 
all  the  commonly  occurring  metals.  Iron,  copper, 
lead,  tin,  platinum,  silver,  gold,  and  others,  alone 

1  The  first  coins  of  this  kind  were  attributed  to  Pheidon,  King 
of  Argos.  See  Grote,  "  History  of  Greece,"  Vol.  III.,  318. 

3° 


COINAGE 

or  in  composition,  have  all  been  used  for  the  pur- 
pose. The  choice  of  the  metal  depends  mainly  on 
the  range  of  incomes  and  prices  in  a  community. 
The  higher  these  range,  the  more  valuable  the  metal 
needed.  It  is  for  this  reason  that  the  coins  in  most 
common  use  in  China  are  of  copper ;  while  in  the 
advanced  countries  of  Europe  and  America  they 
are  silver. 

In  a  highly  developed  country,  however,  coins  of 
several  metals  are  needed  to  meet  the  demands  of 
various  classes  with  different  scales  of  incomes  and 
of  purchases. 

4.  The  Requisites  of  Good  Coinage.  —  The  req- 
uisites of  good  coinage  are  accuracy  in  composi- 
tion and  weight ;  convenience  of  shape,  size,  and 
weight ;  difficulty  of  counterfeiting ;  durability 
and  cognizability.  Great  care  is  taken  to  produce 
coins  as  nearly  perfect  as  possible  in  chemical  com- 
position and  mechanical  form.  Gold  and  silver 
make  more  durable  coins  if  they  contain  a  definite 
proportion  of  copper  in  alloy,  and  accordingly  are 
always  so  manufactured.  But  it  is  important  that 
the  proportions  of  the  money  metal  and  of  the  alloy 
shall  be  exactly  the  same  in  all  coins  of  the  same 
denomination.  Otherwise  some  would  be  more 
valuable  than  others.  This  inequality  of  value 
owing  to  varying  composition  occurred  not  infre- 
quently before  the  art  of  coinage  was  well  devel- 
oped. Equally  important,  for  the  same  reason,  is 
uniformity  of  weight  in  coins  of  the  same  kind.  So 
difficult  is  it  to  attain  this  uniformity  that  all  gov- 


MONEY 

ernments  which  coin  money  allow  a  slight  variation 
from  the  exact  weight  prescribed  for  their  coins. 
This  variation  is  known  as  tolerance  of  the  mint. 
In  the  coinage  of  the  United  States,  for  exam- 
ple, eagles  and  double  eagles  may  vary  one-half 
grain  from  the  weight  set  by  law.  In  practice,  of 
course,  this  maximum  variation  does  not  often 
occur. 

If  coins  always  passed  by  tale,  slight  differences 
in  weight  would  be  of  little  consequence.  But 
they  pass  this  way  only  in  the  country  in  which  they 
are  coined.  In  the  payment  of  foreign  debts  they 
pass  only  by  weight.  It  follows  that  if  the  coins 
of  the  same  denomination  differ  much  in  weight, 
the  heavier  are  picked  out  for  melting  or  for  ex- 
port. For  the  owner  of  the  coins  can  either  sell 
them  as  bullion  or  pass  them  by  tale.  If  they 
contain  so  much  bullion  that  they  are  more  valuable 
in  that  form  than  for  payment  by  tale,  they  will  be 
melted  or  sent  abroad.  Either  operation  depletes 
the  circulation  of  the  country. 

The  best  shape  for  coins  is  that  which  allows  for 
the  least  loss  from  use  and  from  fraudulent  altera- 
tion, and  at  the  same  time  affords  most  convenience 
in  handling.  Most  coins  nowadays  are  circular,  but 
square,  octagonal,  oblong,  and  cubical  coins  are  not 
unknown.  The  circular  is  the  most  convenient. 

A  good  coin  should  not  be  too  large  nor  too 
small  for  convenient  handling.  A  five-dollar  piece 
of  silver  would  be  clumsy,  and  our  old  one-dollar 
gold  piece  was  too  slight. 

32 


COINAGE 

In  order  to  prevent  counterfeiting,  the  device  on 
a  coin  should  be  difficult  to  imitate,  but  in  spite 
of  the  high  state  of  the  art  of  coinage  this  result 
is  hard  to  reach.  The  coin  should  be  hard  and 
tough  enough  to  reduce  loss  by  abrasion  to  a 
minimum,  and  yet  malleable  enough  to  take 
sharply  the  impression  of  the  die.  The  durabil- 
ity of  the  coin  is  generally  promoted  by  putting 
a  rim  around  it  somewhat  above  the  face  so  that 
when  the  coin  is  laid  down  it  rests  on  this  rim. 
Finally,  the  shape,  color,  and  device  should  show 
at  once  what  the  coin  is  and  what  its  value.  The 
device  should  be  simple  and  legible. 

5.  Government  Versus  Private  Coinage.  —  Coin- 
age is  now  everywhere  regarded  as  an  attribute  of 
sovereignty  and  is  done  by  the  government,  al- 
though, historically,  it  did  not  originate  with  govern- 
ments. Doubtless  the  fact  that  coinage  could  be 
so  easily  made  a  source  of  revenue  had  much  to  do 
with  the  early  claim  of  governments  to  its  monop- 
oly ;  but  there  are  better  reasons  for  the  monop- 
oly than  a  custom  derived  from  the  claims  of 
kings  and  overlords  to  exact  tribute  from  trade. 
Since  coins  circulate  among  people  who  have  no 
means  of  verifying  the  accuracy  of  the  device 
upon  them  for  certifying  their  weight  and  fineness, 
it  is  desirable  that  the  devices  shall  be  the  same  on 
all,  and  shall  be  made  by  an  authority  in  which 
every  one  has  confidence.  The  sovereign  power  is 
the  only  one  that  fulfils  this  condition.  Moreover, 
if  coinage  were  left  to  private  enterprise,  the  diffi- 
D  33 


MONEY 

culty  of  verification  would  make  fraud  easy.  Light 
weight  and  spurious  coins  would  be  put  into  cir- 
culation, to  the  damage  especially  of  the  poor  and 
ignorant.  With  competitive  coinage  more,  per- 
haps, than  in  any  other  business  would  it  be  true 
that  the  character  of  competition  sinks  to  the  level 
of  the  most  unscrupulous  competitor.  Finally,  if 
a  profit  is  to  be  made  from  coinage,  this  profit  in 
equity  belongs  to  the  people. 

6.  The  Charge  for  Coinage ;  Seigniorage.  —  Bull- 
ion may  be  turned  into  coin  by  governments  either 
for  their  own  account  or  for  individuals ;  and  they 
may  do  this  free  of  charge  or  at  a  price  which 
exactly  covers  the  expense  of  coinage  or  which 
exceeds  it.  If  the  coinage  is  on  government  ac- 
count, it  is  said  to  be  limited ;  if  it  is  done  for  any 
individual  who  offers  bullion  for  the  purpose,  it  is 
called  free  coinage.  If  the  work  is  done  without 
charge  to  those  who  offer  bullion,  the  coinage  is 
gratuitous.  If  a  fee  is  exacted  equal  to  the  expense 
incurred,  the  charge  is  called  brassage ; l  if  in  ex- 
cess of  this  expense,  it  is  called  seigniorage.  How- 
ever, the  name  "  seigniorage  "  is  commonly  used  for 
both  charges,  and  not  infrequently  describes  simply 
the  government  profit  on  coinage  whether  the  work 
is  done  for  individuals  or  not. 

The  practice  of  charging  for  coinage  varies. 
Most  nations  exact  such  a  charge,  but  those  most 

1  In  compliment  to  Sir  Thomas  Brassey.  Seigniorage  derives  its 
name  from  the  old  feudal  exaction  by  the  "  seignieur  "  of  a  tribute 
from  trade. 

34 


COINAGE 

advanced  try  to  keep  the  charge  equal  to  the  actual 
expense  of  the  work.  To  charge  more  than  this  is 
wrong  to  the  owner  of  the  bullion,  deceives  the 
public,  and  leads  to  the  evils  of  a  debased  currency. 
England  is  the  most  conspicuous,  perhaps  the  only 
important,  country  in  which  no  charge  of  any  kind 
is  made  for  the  coinage  of  the  standard  metal. 

7.  The  Arguments  for  and  against  a  Charge  for 
Coinage. — Several  arguments  are  advanced  in  favor 
of  brassage.  In  the  first  place,  it  is  urged  that  a  coin 
is  a  manufactured  article,  and  that  to  charge  for  its 
making  "puts  the  cost  of  coinage  where  it  belongs." 
It  is  questionable,  however,  whether  this  is  strictly 
true.  The  convenience  to  the  public  at  large,  and 
to  traders  and  producers  other  than  the  bullion 
owners,  which  comes  from  the  existence  of  coin 
is  very  great.  It  is  a  fair  question  whether 
they  should  not  pay  part  at  least  of  the  cost  of 
manufacturing  the  coin. 

A  second  argument  advanced  by  the  advocates 
of  brassage  is  that  if  there  is  a  charge  for  coinage, 
coins  are  less  likely  to  be  exported  than  bullion  to 
discharge  a  foreign  indebtedness,  because  with 
brassage  the  metal  would  be  more  expensive  as 
coin  than  as  bullion.  Closely  allied  with  this  argu- 
ment is  a  third  point,  that  brassage  prevents  the 
melting  down  of  coin  by  jewellers  because  they  will 
not  submit  to  the  loss  of  the  brassage  charge. 

Those  who  take  the  contrary  view,  however, 
and  insist  that  coinage  of  the  standard  metal 
should  be  gratuitous,  point  out,  in  the  first  place, 

35 


MONEY 

that  if  a  charge  is  made,  the  principal  measure 
of  value  will  not  be  perfect.  Inasmuch  as  cost 
of  coinage  will  vary  in  different  places,  the  same 
amount  of  gold  will  be  embodied  in  coins  of  differ- 
ent values.  In  the  second  place,  it  is  urged  that 
if  gold  in  the  form  of  coin  has  the  same  value, 
weight  for  weight,  as  in  the  form  of  bullion,  when 
prices  change  so  that  less  money  is  needed,  the 
coinage  will  adapt  itself  much  more  rapidly  and 
with  a  nicer  adjustment  to  the  new  level  of  prices. 
It  is  further  urged  that  a  coin  of  the  country 
which  makes  no  brassage  charge  is  far  more  likely 
to  be  used  by  the  people  of  other  countries.  That 
this  has  happened  with  the  English  sovereign 
is  undeniable.  The  use  of  its  coins  in  foreign 
countries  may  help  the  trade  of  a  country  by  mak- 
ing people  familiar  with  its  money.  "  Such  circu- 
lation, it  is  claimed,  will  amount  to  a  demand  for 
the  trade  of  the  country  conducting  the  coinage, 
which  it  can  very  well  afford  to  pay  for,  as  truly 
as  a  merchant  can  afford  to  pay  for  advertise- 
ments in  a  newspaper,  or  a  circus  manager  for  hav- 
ing his  fearful  and  wonderful  pictures  displayed 
along  the  street."  1  A  fourth  argument  used  by 
advocates  of  gratuitous  coinage  is,  that  if  merchants 
should  find  it  necessary  to  export  coin,  on  account 
of  the  difficulty  of  getting  bullion,  they  would  add 
the  loss  of  the  amount  charged  to  the  price  of 
their  imported  goods  and  so  transfer  the  loss  to 
consumers. 

1  Walker,  "  Money,"  185. 
36 


COINAGE 

Finally,  the  advocates  of  gratuitous  coinage 
insist  that  the  loss  by  export  is  less  than  may  be 
supposed,  for  the  reason  that  a  great  many  of  the 
exported  coins  are  eventually  returned.  This  is 
certainly  true  in  the  case  of  English  sovereigns 
and  American  eagles.  It  has  become  a  practice  in 
various  countries  to  hold  imported  coins  for  export 
when  the  tide  of  trade  turns. 

What  has  been  said  thus  far  about  coinage  and 
seigniorage  applies  to  the  principal  coins  of  a 
country.  Besides  these,  which  comprise  the  stand- 
ard unit  and  its  multiples,  every  country  needs 
coins  of  smaller  denominations,  submultiples  of 
the  standard  unit.  These  are  called  subsidiary 
coins,  and  may  or  may  not  be  made  of  the  stand- 
ard metal.  Usually,  even  in  gold  standard  sys- 
tems, the  subsidiary  coins  are  of  silver,  because 
coins  of  the  small  value  required  would  be  incon- 
veniently small  and  light  in  weight.  Coins  of  the 
smallest  denomination  are  usually  copper. 

The  number  of  standard  coins,  as  dollars,  which 
may  be  minted  from  an  ounce  of  gold,  is  fixed  by 
law,  and  is  the  mint  price  of  gold.  This  mint 
price  has  no  relation  to  the  purchasing  power  of 
gold.  It  depends  entirely  on  the  amount  of  gold 
put  into  the  unit  of  money. 

When  coinage  is  gratuitous,  the  owner  of  bullion 
is  entitled,  in  theory,  to  take  this  bullion  to  the  mint 
and  get  back  its  full  value  in  coin.  He  may  have 
to  wait,  however,  until  his  metal  is  coined ;  and  if 
so,  he  loses  interest  on  it  in  the  interval.  To  avoid 

37 


MONEY 

this  delay  the  English  law  requires  the  Bank  of 
England  to  buy  all  gold  offered  at  ^3,  ijs.  gd.  per 
ounce,  which  is  \\d.  less  than  the  bullion  owner 
would  get  if  he  waited  for  his  gold  to  be  coined. 
This  \\d.  is  to  cover  the  expense  to  the  bank  for 
interest  and  the  labor  of  weighing  and  assaying 
the  metal.  When  the  bank  is  in  need  of  gold,  it 
sometimes  foregoes  part  of  this  fee  and  pays  more 
per  ounce  than  ^3,  I'js.  yd.  The  bank  is  then 
said  to  pay  a  premium  on  gold.  The  expression 
is  not  technically  correct,  since  one  gold  sovereign 
is  not  worth  more  than  another.  It  simply  means 
that  the  bank's  need  for  gold  is  so  great  that  it  is 
willing  to  forego  part  of  the  profit  on  its  purchases. 
In  the  United  States  the  owner  of  bullion  does 
not  have  to  wait  for  his  coin,  but  he  must  pay  for 
the  alloy. 


CHAPTER   IV 

THE  CURRENCY   AND  THE   PRINCIPLES   OF  ITS 
CIRCULATION 

REFERENCES:  Farrer,  Sir  T.  H.,  What  do  we  pay  With  ?  Ch.  4; 
Giffen,  R.,  Gresham's  Law,  Econ.Journ.,Vol.  I.,  p.  304;  Jevons,W.  S., 
Money  and  the  Mechanism  of  Exchange,  Ch.  8 ;  Laughlin,  J.  L., 
History  of  Bimetallism  in  the  United  States,  pp.  26-30,  65-69,  and 
elsewhere;  The  Principles  of  Money,  Chs.  5,  12,  15;  Moses,  B., 
Legal  Tender  Notes  in  California,  Quar.  Journ.  Econ.,  October,  1892  ; 
Nicholson,  J.  S.,  Money  and  Monetary  Problems,  Pt.  L,  Ch.  4 ; 
Report  of  the  Comptroller  of  the  Currency,  1896,  Vol.  I.,  pp.  57-97  ; 
Report  of  the  Indianapolis  Monetary  Commission,  1898,  pp.  1 13-130  ; 
Scott,  W.  A.,  Money  and  Banking,  Ch.  2 ;  Walker,  F.  A.,  Money, 
pp.  193-195  ;  White,  H.,  Money  and  Banking,  2d  ed.,  p.  25. 

1.    Classification  of   Media  of   Exchange. — The 

medium  of  exchange,  or  the  circulating  medium, 
comprises  all  the  instrumental  goods  used  for  pay- 
ing debts  or  purchasing  commodities.  Payment 
may  be  made,  indeed,  with  an  article  which  to  the 
receiver  is  a  direct  consumption  good  rather  than 
an  instrumental  good,  or  one  which  he  uses  by 
passing  it  on  for  his  payments  in  turn.  In  that 
case  the  article  is  not  part  of  the  medium  of 
exchange. 

Some  of  the  articles  which  enter  into  the  me- 
dium of  exchange  are  generally  current,  or  com- 
monly accepted  in  payment,  without  any  reference 

39 


MONEY 

to  any  characteristic  except  their  passableness. 
These  articles  constitute  the  currency.  Other 
portions  of  the  medium  of  exchange  do  not  have 
a  circulation  which  can  properly  be  called  general ; 
they  are  accepted  primarily  because  of  the  credit 
of  the  issuer,  and  are  not  currency.  Accord- 
ingly, we  may  classify  the  media  of  exchange  as 
follows  :  — 

(a)  The  medium  of  general  circulation,  or  the 
currency,  including  (i)  metallic  money;  (2)  incon- 
vertible paper  money;  (3)  certificates  of  deposit  of 
metallic  money ;  (4)  credit  paper  which  has  a  gen- 
eral circulation,  as  convertible  notes. 

(fr)  The  medium  of  restricted  circulation,  or  non- 
currency,  including  (i)  credit  paper  which  does 
not  circulate  generally,  as  checks  and  drafts,  rep- 
resenting bank  deposits ;  and  bills  of  exchange, 
representing  goods ;  (2)  securities  representing 
goods  or  property. 

It  is  obvious,  then,  that  the  currency  is  not  sim- 
ple and  homogeneous,  but  complex  and  heteroge- 
neous. In  most  countries  we  find  coins  of  different 
metals  and  of  different  denominations  passing  side 
by  side  with  paper  money,  and  with  credit  paper 
of  private,  public,  or  semi-public  origin.  There 
are,  indeed,  occasional  historical  instances  in  which 
the  currency  of  a  community  or  country  has  con- 
sisted of  a  single  article.  This  was  probably  the 
case  in  ancient  Lacedasmon,  where  iron  money  was 
for  a  long  time  used  alone,  while  in  some  other 
ancient  states  copper  was  used  by  itself.  Ordi- 

40 


THE    CURRENCY 

narily,  however,  the  only  cases  among  modern 
nations  in  which  we  find  a  single  thing  used  as 
money  are  those  in  which  the  currency  consists 
of  very  depreciated  paper  money.  For  example, 
during  our  Civil  War  practically  the  only  circulat- 
ing medium  in  the  United  States  was  government 
and  bank  notes.  The  copper  cents,  and  perhaps 
some  silver,  remained  in  use ;  but  the  fact  that 
notes  were  issued  for  sums  as  small  as  five  cents 
is  the  best  evidence  that  coins  of  that  denomination 
were  out  of  circulation. 

2.  Adaptation  of  the  Medium  of  Exchange  to 
the  Scale  of  Incomes  and  Prices.  —  It  is  not  an 
accident,  of  course,  that  the  medium  of  exchange 
is  generally  composite.  It  is  due  principally  to 
the  need  of  adapting  the  currency  to  a  variety  of 
grades  of  incomes  and  payments.  A  minor  cause 
is  the  necessity  for  having  coins  convenient  to 
handle.  One  kind  of  currency  would  not  be  con- 
venient for  payments  of  all  amounts.  A  cheap 
metal  would  be  inconvenient  for  making  large  pay- 
ments ;  a  dear  one,  for  making  those  of  small 
amount.  The  Chinese  use  "  cash,"  each  of  which 
is  equal  in  value  to  a  fraction  of  an  American 
cent,  because  the  scale  of  ordinary  purchases  in 
China  makes  coins  of  that  small  purchasing  power 
suitable  for  daily  use.  If  we  with  our  higher  range 
of  incomes  and  prices  should  attempt  in  this  coun- 
try to  use  coins  of  so  low  a  denomination,  we  would 
experience  great  inconvenience  from  having  to 
carry  about  large  amounts  of  them  to  make  ordi- 


MONEY 

nary  payments.  On  the  other  hand,  it  would  be 
impracticable  for  the  Chinese  to  use  gold  for  their 
small  purchases. 

The  best  medium  of  exchange,  therefore,  pro- 
vides instruments  of  exchange  of  different  kinds, 
each  kind  adapted,  on  the  whole,  to  different  scales 
of  payments.  To  be  sure,  if  paper  money  alone  is 
used,  it  can  be  issued  in  any  denomination  with 
equal  convenience ;  but,  as  we  shall  see,  such  a 
system  involves  dangers  which  make  it  extremely 
inadvisable.  Accordingly,  the  circulating  medium 
of  most  countries  comprises  metal  money,  paper 
money,  and  private  credit  instruments.  As  a  rule, 
the  metallic  money  consists,  first,  of  the  principal, 
or  standard,  money,  usually  gold  or  silver ;  second, 
of  subsidiary  coins,  which  are  usually  of  a  different 
metal  from  the  standard  and  dependent  on  the 
standard  for  their  nominal  purchasing  power. 
Where  gold  is  the  standard  money,  the  smallest 
gold  coin  is  usually  of  a  denomination  such  as  the 
majority  of  people  will  be  able  to  use  in  their 
larger  ordinary  payments.  In  the  United  States 
the  smallest  coin  of  gold  is  the  two-and-one-half 
dollar  piece.  Gold  dollars  were  formerly  coined, 
but  were  found  too  small  for  easy  handling  and 
were  easily  lost.  In  England,  the  smallest  gold 
coin  is  the  half-sovereign ;  in  Germany,  the 
five-mark  piece ;  and  in  France,  the  five-franc 
piece. 

The  subsidiary  coins  are  subdivisions  of  the  stand- 
ard coin  and  are  generally  silver  and  copper.  The 

42 


THE    CURRENCY 

smallest  denominations  are  sometimes  called  minor 
coins.  In  the  United  States,  subsidiary  coins,  like 
the  half-dollars,  quarter-dollars,  and  dimes,  are  of 
silver ;  the  five-cent  piece  is  nickel,  and  the  cents 
are  copper.  Other  countries,  as  England,  Ger- 
many, and  France,  use  silver  and  copper  for  their 
smaller  coins. 

Paper  money  is  used  both  by  itself  and  in  com- 
bination with  coins.  The  technical  advantages  of 
paper  money  are  its  convenience  to  handle,  its  easy 
and  cheap  manufacture,  and  the  possibility  of  mak- 
ing it  of  any  denomination.  It  may  be  issued  by 
the  government,  by  banks,  or  by  other  corporations. 
In  the  United  States  paper  money  is  issued  both 
by  the  government  and  the  banks.  The  same  is 
true  in  Canada ;  but  in  England,  Germany,  and 
France  the  paper  money  is  all  bank  money. 

3.  The  Credit  Portion  of  the  Medium  of  Ex- 
change. —  Besides  the  kinds  of  medium  of  exchange 
thus  far  mentioned,  there  are  certain  private  credit 
instruments  which  are  used  to  effect  exchanges. 
Broadly  speaking,  these  include  bank  deposits  rep- 
resented by  checks,  bank  drafts,  whether  written 
or  telegraphic,  bills  of  exchange,  and  negotiable  se- 
curities. In  so  far  as  the  last  mentioned  are  used 
in  making  exchanges  and  effecting  payments,  they 
may  be  properly  regarded  as  part  of  the  medium 
of  exchange. 

Deposit  currency,  consisting  of  credits  of  deposi- 
tors in  banks,  and  represented  in  circulation  by 
checks  and  drafts  and  similar  paper,  has  come  to 

43 


MONEY 

play  a  part  of  immense  importance  in  modern  busi- 
ness, far  exceeding  that  played  by  notes.  Some 
idea  of  this  importance  may  be  had  from  the 
fact  that,  as  shown  by  the  clearing-house  returns 
of  the  United  States,  transactions  aggregating 
$114,068,837,569  were  performed  by  means  of  this 
kind  of  currency  in  1903.  At  various  times,  in 
England  and  in  our  own  country,  efforts  have  been 
made  to  determine  the  proportion  of  payments 
made  by  this  part  of  the  medium  of  exchange,  by 
determining  in  what  proportion  it  enters  into  the 
receipts  of  banks.  All  these  examinations  have 
shown  that  the  receipts  of  the  banks  are  over  90 
per  cent,  in  credit  paper  and  less  than  10  per  cent. 
in  all  kinds  of  money.  The  most  extensive  exami- 
nation into  the  matter  was  made  in  the  United 
States  in  1896,  and  secured  separate  returns  of 
the  deposits  of  people  engaged  in  retail  trade, 
wholesale  trade,  and  all  other  businesses.  It  ap- 
peared from  the  figures  that  at  that  time  about 
half  the  volume  of  retail  payments  were  made  with 
private  credit  currency,  and  more  than  nine-tenths 
of  the  wholesale  business.  After  making  allowances 
for  errors  and  omissions  it  seemed  from  that  ex- 
amination that  perhaps  70  or  75  per  cent,  of  the 
payments  in  settlement  of  mercantile  business  in 
the  United  States  at  that  time  were  made  with 
checks  and  other  similar  paper.1  Of  a  total  vol- 
ume of  clearings  of  the  New  York  clearing  house, 

1  See  Report  of   the  Comptroller    of   the    Currency,  1896,  and 
The  Journal  of  Political  Economy,  March,   1897. 

44 


THE    CURRENCY 

of  $70,833,655,940,   in   1903,  only  4.68   per  cent, 
were  settled  with  money. 

4.  Securities  as  a  Part  of  the  Medium  of  Ex- 
change. —  Another  important  part  of  the  modern^ 
medium  of  exchange  consists  of  negotiable  secu- 
rities, especially  the  bonds  and  stocks  of  corpora- 
tions and  the  bonds  of  cities  and  states.  When 
used  as  currency,  these  have  a  certain  resemblance 
to  paper  money.  Paper  money  represents  or 
gives  command  over  goods  in  general ;  securities 
represent  or  give  command  over  certain  general 
classes^ of  goods.  In  other  words,  they  avoid,  al- 
though far  less  completely,  the  lack  of  coincidence 
in  barter.  Their  use  for  the  settlement  of  debts  is 
confined,  of  course,  to  a  special  field,  their  service 
being  mainly  in  the  settlement  of  transactions  in 
such  paper  itself,  and,  indirectly,  in  the  settlement 
of  the  balances  of  international  trade.  We  shall 
examine  in  another  chapter  the  part  they  play 
in  this  latter  matter.  In  the  settlement  of  stock 
exchange  transactions  the  sales  of  stock  by  the 
brokers  are  set  off  against  their  purchases,  in  the 
stock  exchange  clearing  house,  and  the  balance  is 
paid  in  money  or  checks.  Thus  in  New  York 
"on  the  single  day  of  January  23,  1899,  there 
were  sold  5,006,900  shares  of  stock  valued  at 
$350,900,000  by  the  transfer  of  only  735,000 
shares  and  the  payment  of  balances  amounting  to 
$724,500."  * 

1  Charles  A.  Conant  in  The  Annals  of  the  American  Academy, 
September,  1899,  p.  44. 

45 


MONEY 


5.  Standard  Money,  Money  of  Account,  and 
1  Medium  of  Exchange.  —  A  distinction  must  be 
\  made  between  standard  money,  money  of  account, 
\and  current  money.  The  standard  may  be  gold, 
Yhe  money  of  account  may  be  silver,  and  the  cur- 
rent medium  of  exchange  may  be  paper.  The 
standard  money  is  that  to  whose  value  the  value 
of  the  other  kinds  of  money  is  referred  for  deter- 
mination, but  it  may  not  be  coined.  The  money 
of  account  is  that  in  which  prices  are  usually  ex- 
pressed, and  the  current  money  is  that  in  which 
actual  payments  are  made.  In  the  United  States, 
for  example,  the  standard  is  the  gold  dollar,  25.8 
grains  of  gold  nine-tenths  fine,  which  is  no  longer 
issued.  In  some  parts  of  the  country  payments 
were  formerly  reckoned  in  a  money  of  account 
spoken  of  as  bits  and  shillings.1  The  public  ac- 
counts of  New  York  State  were  kept  in  pounds, 
shillings,  and  pence2  until  1796,  although  the 
standard  from  1792  was  the  dollar.  Payments 
were  made  in  various  kinds  of  paper  and  foreign 
coins.  In  England  the  standard  is  the  gold 
sovereign,  equivalent  at  par  to  $4.S6f .  Accounts, 
however,  are  sometimes  reckoned  in  guineas,3 
sometimes  in  pounds,  and  sometimes  in  shillings, 
while  the  money  actually  used  in  payment  may  be 

1  A  bit  and  a  shilling  were  each  \z\  cents. 

2  First  Annual  Report  of  the  Comptroller,  NCT.O  York  Assembly 
Journal,  Vol.  XVI.,  p.  20.     The  New  York  pound  was  £2.50,  eight 
shillings  to  the  dollar. 

3  Twenty-one  shillings. 

46 


THE    CURRENCY 

either  gold,  silver,  or  paper.  The  Old  English,  or 
Anglo-Saxon,  unit  of  payment  was  a  pound  of 
silver.  The  money  of  account  was  the  shilling, 
and  the  current  coins  were  silver  pence  and  half- 
pence. Similar  instances  can  be  found  in  other 
countries. 

6.  Legal  Tender  Money.  —  The  currency  may  in- 
clude legal  tender  money  and  money  that  is  not 
legal  tender.     Legal  tender  money  is  money  the 
offer  or  tender  of  which  in  payment  of  a  debt  con- 
stitutes, under  the  law,  a  sufficient  discharge  of  the 
obligation.     The  declaration  that  such  and  such  a 
thing  shall  be  legal  tender  is  not  necessary  to  its 
use  as  a  medium  of  payment,  although  it  doubtless 
facilitates  that  use.     A  legal  tender  law  prevents 
uncertainty  in  contracts,  and  in  a  measure  protects 
ignorant  and  weak  creditors  from  being  imposed 
on  with  spurious   money.     It  does  not,  however, 
prevent  people  from  making  contracts  to  be  settled 
by  other  means  of  payment. 

Under  a  legal  tender  law,  the  standard  money  is 
usually  made  unlimited  legal  tender,  while  the  sub- 
sidiary money  is  limited  to  payments  of  certain 
amounts.  In  the  United  States,  for  example,  gold 
coins  and  silver  dollars  are  unlimited  legal  tender. 
The  subsidiary  coins,  half  and  quarter  dollars  and 
dimes,  are  legal  tender  to  the  amount  of  ten  dollars, 
while  the  five-cent  piece  and  the  copper  cent  are 
legal  tender  for  twenty-five  cents. 

7.  Systems  of  Metallic  Currency.  —  The  system 
of  metallic  currency  in  use  at  any  time  depends  on 

47 


MONEY 

the  development  of  coinage  and  on  the  scale  of  in- 
comes and  prices.  Uncoined  metal  and  crudely 
fashioned  coins  pass  by  weight ;  those  more 
accurately  made,  by  tale.  A  legal  tender  system 
by  tale  could  not  well  be  used  until  coinage  was 
perfected.  A  single  metal  would  serve  a  com- 
munity with  a  uniform  scale  of  incomes  and  prices, 
while  more  than  one  would  best  answer  the  purpose 
where  considerable  differences  exist  in  the  economic 
conditions  of  different  social  classes.  Accordingly, 
the  possible  systems  of  metallic  currency  fall  into 
five  classes.  Jevons  1  describes  them  as  currency 
by  weight,  unrestricted  currency  by  tale,  the  single 
legal  tender  system,  the  multiple  legal  tender 
system,  and  the  composite  legal  tender  system. 
Under  the  first  of  these  the  government  simply 
provides  a  system  of  weights  and  measures,  and 
people  who  have  payments  to  make  use  these  in 
weighing  out,  or  measuring  out,  the  metal  used  as 
money.  This  is  undoubtedly  the  oldest  method 
of  payment  with  money.  Some  of  our  monetary 
terms,  like  the  English  pound,  the  French  livre, 
the  Hebrew  shekel,  the  Greek  and  Roman  talent, 
and  others,  were  originally  names  of  units  of 
weight. 

In  the  system  of  unrestricted  currency  by  tale, 
the  metal  is  coined  into  pieces  of  uniform  weight 
and  fineness,  their  value,  or  their  weight  and  fine- 
ness, being  stamped  upon  them,  and  they  are 
passed  from  hand  to  hand  on  the  basis  of  this 

1  "  Money  and  the  Mechanism  of  Exchange,"  Ch.  ix. 
48 


THE    CURRENCY 

certification.  The  nearest  approach  to  this  system 
to-day  is  in  the  use,  for  international  payments,  of 
gold  bars  made  at  the  government  mints. 

Under  the  single  legal  tender  system  only  one 
metal  is  coined  as  legal  tender.  The  iron  money  of 
Sparta  is  an  example.  Such  a  system  is  suitable 
for  a  community  of  simple  economic  life.  Under 
the  legal  multiple  tender  system,  coins  of  differ- 
ent metals  are  used  at  a  fixed  ratio  and  each  is  an 
unlimited  legal  tender.  Bimetallism  is  the  most 
familiar  example.  Under  the  composite  legal 
tender  system  one  coin  is  unlimited  legal  tender, 
while  others  are  so  only  to  a  limited  extent.  This 
is  the  system  of  advanced  countries  to-day. 

8.  Systems  of  Paper  Currency. — There  are 
three  systems  of  paper  money,  —  representative 
paper  money,  fiduciary  paper  money,  and  fiat 
paper  money.  The  first  is  made  up  of  notes  which 
are  receipts  for  metal  deposited  with  the  issuer  of 
the  paper,  either  in  the  form  of  coined  or  of  un- 
coined metal.  Credit  paper  money  consists  of  notes 
promising  to  pay,  with  or  without  conditions,  speci- 
fied sums  of  metallic  money.  Fiat  paper  money 
consists  of  printed  statements  that  the  notes  are  of 
such  and  such  denominations,  or  represent  such 
and  such  sums  of  metallic  money.  They  are 
always  in  the  form  of  promises  to  pay,  but  are  not 
intended  to  be  paid.  Any  one  of  these  kinds  of 
paper  money  may  be  legal  tender,  and  any  one  of 
them  may  be  issued  either  by  governments  or  by 
banks.  Not  infrequently  both  metallic  and  paper 
E  49 


MONEY 

money  are  legal  tender  at  the  same  time.  Th;s 
is  the  case  in  the  United  States,  where  gold  and 
silver  are  legal  tender  equally  with  greenbacks,  or 
government  notes  issued  during  the  Civil  War, 
and  the  treasury  notes  issued  against  the  de- 
posits of  silver  bullion  under  the  Sherman  law 
of  iSQO.1 

9.  Fundamental  Causes  of  Circulation  of  Media 
of  Exchange.  —  The  underlying  cause  of  the  circu- 
lation of  any  and  all  of  the  kinds  of  media  of 
exchange  is  confidence  in  their  acceptability. 
The  bases,  or  the  causes  of  this  confidence,  are 
four  :  (a)  belief  in  social  stability,  or  the  persist- 
ence of  social  habit ;  (b)  law,  or  the  authority  of  a 
particular  government;  (<:)  the  credit  of  the  issuer, 
whether  a  public  body  or  a  private  person  or  cor- 
poration ;  and,  finally,  (</)  direct  agreement  among 
individuals.  Each  of  these  forces  promotes  the 
circulation  of  a  different  kind  of  money.  The 
persistence  of  social  habit  is  the  primary  cause  of 
the  circulation  of  commodity  money.  As  usually 
put,  a  commodity  money,  like  gold,  is  more  widely 
acceptable  than  any  other  kind  because  it  has 
value  independent  of  that  which  arises  from  its  use 
as  money.  But  this  value  can  be  present  only  so 
long  as  the  demand  for  the  article  continues.  To 
accept  it  in  payment  is,  therefore,  to  show  one's 
belief  that  the  general  desire  to  own  this  particular 
commodity  is  permanent ;  that  men  will  continue 

1  By  the  currency  law  of  1900  these  notes  are  being  replaced 
with  silver  dollars. 

50 


THE    CURRENCY 

to  act  in  the  future  as  they  have  acted  in  the  past ; 
that  social  habit  is  persistent. 

The  second  basis  of  confidence  which  may  lead 
one  to  accept  a  certain  thing  in  payment  of  debts 
due  him,  or  of  sales  made  by  him,  is  the  stability 
of  the  particular  government  which  issues  it  as 
money.  People  believe  that  the  provisions  made 
to  create  a  demand  for  this  kind  of  money,  by 
way  of  receiving  it  for  taxes,  making  it  legal  tender, 
and  so  on,  will  lead  to  its  acceptance,  although  it 
has  no  direct  utility  and  no  specific  value.  Or  else 
they  think  the  law  can  enforce  its  acceptance. 

In  the  next  place,  an  article  may  be  accepted 
in  payment  of  debt  or  sales  because  of  confidence 
in  the  integrity  and  stability  of  an  individual  or  a 
corporation.  The  receiver  believes  that  the  issuer 
will  redeem  the  article ;  in  other  words,  guarantees 
that  it  will  be  accepted  by  himself,  if  not  by  some 
one  else,  in  exchange  for  articles  of  direct  utility. 
The  cause  of  circulation  here  is  commercial  credit. 
Examples  of  such  media  of  exchanges  are  checks 
and  bank  notes. 

In  the  fourth  place,  the  confidence  which  leads 
one  to  accept  a  given  article  in  payment  may  be 
the  direct  agreement  of  the  individuals  of  a  certain 
social  or  industrial  group  so  to  accept  it.  There 
is  hardly  to  be  found  any  historical  illustration  of 
such  an  agreement.  Some  writers  have  written 
on  the  origin  of  money  in  a  way  to  imply  the  exist- 
ence of  such  a  convention  or  agreement,  but  there 
is  no  evidence  that  this  has  ever  been  made.  The 


MONEY 

nearest  approach  to  it  is,  perhaps,  the  use  of  checks 
by  gamblers  in  settling  their  gambling  claims.  A 
case  resembling  such  an  agreement  is  found,  also, 
in  the  action  of  the  nations  that  composed  the  Latin 
Union.  If  international  bimetallism  is  ever  estab- 
lished, we  shall  have  another  remote  analogy.  The 
cause  of  circulation  in  this  case  will  be  international 
agreement,  enforced  in  each  country  by  its  own 
laws. 

It  is  not  a  matter  of  concern  to  us  at  present 
to  consider  which  one  of  these  causes  of  circu- 
lation may  fairly  be  considered  the  best  on  which 
to  rest  the  medium  of  exchange.  If  any  one  of 
them  is  present,  the  article  for  which  it  causes  a 
demand  will  serve  as  a  medium  of  exchange.  The 
first  and  most  general  principle  of  circulation,  then, 
is  this  :  The  primary  cause  of  the  circulation  of 
money  is  the  receiver's  belief  that  others  will  take 
it  from  him  in  turn.  The  area  of  circulation  de- 
pends on  the  basis  of  this  confidence  which  induces 
acceptability,  and  may  vary  from  the  small  group, 
in  which  the  cause  of  acceptability  is  the  personal 
integrity  of  the  issuer,  to  the  larger  group  influ- 
enced by  political  and  legal  authority,  or  to  the 
largest  group  which  takes  in  payment  only  articles 
whose'acceptability  is  the  result  of  social  habit. 

10.  Gresham's  Law ;  its  Operation  and  Limita- 
tions. —  Although  an  article  may  be  generally 
acceptable  as  money,  different  portions  of  it  may 
have  different  degrees  of  acceptability.  If  coins 
of  the  same  denomination  differ  in  weight  or  fine- 

52 


THE    CURRENCY 

•ness,  the  better  ones  will  serve  not  only  for  ordi- 
nary payments,  as  do  the  inferior  coins,  but  also 
for  foreign  payments  or  for  making  more  valuable 
articles  in  the  arts.  They  are  likely,  therefore,  to 
be  treated  as  bullion  and  used  for  export  or  in  the 
arts.  Not  every  one,  of  course,  who  handles  coins 
lays  aside  the  better  ones  in  order  to  make  a  profit 
from  their  greater  value.  This  is  done  by  money 
dealers  who  handle  large  amounts,  so  that  a  small 
profit  on  each  coin  yields  a  large  aggregate  gain. 
Their  work  of  selecting  and  withdrawing  from 
circulation  the  more  valuable  coins  is  known  as 
picking  and  culling  the  coin.  So  likely  is  the 
elimination  of  the  more  valuable  coins  from  circu- 
lation to  occur,  if  there  is  much  variation  in  coinage, 
that  it  is  commonly  said  that  "  bad  money  drives  out 
good  money."  This  statement  of  the  phenome- 
non is  known  as  Gresham's  law,  from  Sir  Thomas 
Gresham,  who  called  the  attention  of  modern  stu- 
dents anew  to  the  occurrence  more  sharply  than  any 
writer  up  to  his  time  had  done.  The  phenomenon 
was  known,  however,  long  before  Gresham's  time, 
although  perhaps  not  scientifically  formulated.1 

1  That  it  was  known  as  early  as  the  time  of  Aristophanes,  at 
least,  is  shown  by  the  following  passage  in  the  "  Frogs "  (lines 
717  ff.):- 

"  Oftentimes  we  have  reflected  on  a  similar  abuse 
In  the  choice  of  men  for  office  and  of  coins  for  common  use  ; 
For  your  old  and  standard  pieces,  valued  and  approved  and  tried, 
Recognized  in  every  realm  for  trusty  stamp  and  pure  assay, 
Are  rejected  and  abandoned  for  the  trash  of  yesterday  ; 
For  the  vile,  adulterate  issue,  drossy,  counterfeit,  and  base, 
Which  the  traffic  of  the  city  passes  current  in  their  place." 

53 


MONEY 

The  second  principle  of  circulation  is,  then  :  If  a 
money  of  one  material  is  in  use,  the  less  valu- 
able portions  of  it  tend  to  remain  in  circulation, 
and  the  more  valuable  to  disappear. 

There  is  an  apparent  paradox  in  the  operation 
of  Gresham's  law.  Ordinarily,  people  are  led  by 
their  self-interest  to  choose  the  commodity  which 
is  better  and  reject  the  one  which  is  worse.  In 
the  case  of  money,  however,  they  seem  to  keep  the 
bad  and  reject  the  good.  The  apparent  paradox 
is  easily  explained  if  we  regard  the  owner  of  money 
as  a  seller  rather  than  as  a  buyer.  He  keeps  the 
inferior  money  because  it  will  serve  his  purpose 
for  payment;  he  sells  the  better  goods  because  he 
can  get  more  for  them  in  that  way.  But  it  is  not 
always  the  case  that  two  articles  which  differ  some- 
what in  quality,  yet  are  so  nearly  alike  that  either 
serves  fairly  well  the  purpose  of  the  other,  will 
command  different  prices.  They  will  sell  at  the 
same  price  if  the  demand  is  strong  enough  to 
need  all  of  both,  provided  the  price  is  high  enough 
to  offset  the  superior  cost  of  production  of  the  one 
which  is  more  expensive.  This  is  the  case  with 
coins  of  unequal  bullion  value.  If  the  demand  is 
not  large  enough  to  use  all  of  both,  part  or  all  of 
the  better  coins  will  be  withheld  from  circulation  by 
tale,  and  held  at  a  higher  price  as  bullion.  We 
thus  find,  as  a  limitation  of  Gresham's  law,  the 
condition  that  the  aggregate  of  good  and  bad  coins 
must  be  in  excess  of  the  country's  need  for  cir- 
culating medium.  To  put  the  matter  in  another 

54 


THE    CURRENCY 

way,  we  may  say  that  if  business  is  so  large  and 
brisk  that  it  needs  all  of  both  kinds  of  coin  to  per- 
form exchanges,  the  demand  for  them  for  mone- 
tary purposes  raises  the  value  of  the  inferior  coins 
to  equality  with  the  bullion  value  of  the  full  weight 
coins.  This  cannot  be  exceeded  because  the  heavier 
coins  will  not  be  taken  anywhere  for  more  than 
their  bullion  value.  If  there  is  any  further  increase 
in  the  purchasing  power  of  coin,  foreign  coins  or 
bullion  will  be  imported,  as  we  shall  see  later,  and 
the  value  of  the  home  coin  will  not  be  able  to  rise 
above  the  high-water  mark  of  the  value  of  the 
bullion  in  the  full  weight  coins. 

Again,  an  inferior  money  will  not  circulate  in 
opposition  to  custom  or  public  opinion.  Perhaps 
the  most  notable  historical  instance  of  this  fact 
was  found  in  California  during  the  Civil  War. 
The  people  of  California  would  have  none  of  the 
greenbacks  issued  by  the  government ;  public 
opinion  was  against  their  use.  In  consequence, 
gold  continued  to  be  the  money  of  California 
while  the  rest  of  the  country  was  using  paper. 
Sometimes,  too,  a  law  which  requires  the  use  of  a 
specified  kind  of  money  may  prevent  its  entire 
displacement  by  an  inferior  currency.  An  illus- 
tration of  this  is  found  in  the  state  of  affairs  that 
prevailed  in  this  country  in  the  early  fifties. 
Through  the  operation  of  the  independent  trea- 
sury law,  which  forbade  the  government  to  keep 
the  public  money  in  banks  or  to  accept  bank  notes 
in  payment  of  public  dues,  gold  coin  was  kept  in 

55 


MONEY 

circulation  in  spite  of  the  tendency  exerted  by  the 
small  notes  of  the  banks  to  drive  it  out.1 

The  last  illustration  given  suggests  a  wider  ap- 
plication of  Gresham's  law.  It  operates  not  only 
when  the  currency  is  of  one  material,  with  its 
parts  of  different  values,  but  also  when  the  cur- 
rency consists  of  two  or  more  forms  of  money 
such  as  gold  and  paper,  or  gold  and  silver,  pro- 
vided both  forms  are  legally  usable  in  the  payment 
of  debts. 

There  are  many  historical  instances  of  the  loss 
of  metal  money  by  a  country  on  account  of  the 
issue  of  paper.  In  our  own  country  the  most 
notable  occurrence  of  the  kind  was  the  suspen- 
sion of  specie  payment  and  loss  of  gold  on  account 
of  the  issue  of  greenbacks  during  the  Civil  War. 
A  less  obvious,  but  equally  correct,  illustration  is 
found,  however,  in  our  monetary  experience  under 
the  operation  of  the  Sherman  law  of  July  14, 
1890.  According  to  that  law  the  Secretary  of 
the  Treasury  was  compelled  to  buy  four  million 
ounces  of  silver  monthly,  and  to  issue  notes  on 
the  basis  of  the  bullion  thus  secured.  It  was  the 
anticipation  of  the  friends  of  the  measure  that 
these  notes,  when  they  went  into  circulation,  would 
increase  the  currency  of  the  country  and  raise  the 
level  of  prices.  Their  issue  had  no  such  result. 
The  export  of  gold  from  the  time  the  notes  be- 
gan to  be  issued  until  July,  1893,  almost  exactly 

1  Kinley,  "The  Independent  Treasury  of  the  United  States," 
p.  62. 

56 


THE    CURRENCY 

equalled  the  amount  of  notes  put  in  circulation. 
The  gold  exports  were  $141,017,158,  while  the 
note  issue  was  $140,661,694. 

Gresham's  law  operates  because  most  people 
are  completely  under  the  influence  of  habit  in 
their  use  of  money,  and  only  a  few  keenly  alive 
to  their  interest  in  the  matter.  Few  people  have 
any  knowledge  of  the  laws  enacted  to  regulate 
circulation.  They  take  a  coin  or  a  note  because 
it  looks  familiar.  A  coin  may  be  overweight,  but 
most  of  us  take  no  notice  of  the  fact  and  seek  no 
profit  from  it.  The  force  of  habit  in  money  mat- 
ters has  sometimes  been  curiously  shown  by  the 
difficulty  of  getting  new  coinage  into  circulation. 
Austria,  for  example,  has  found  it  necessary  to 
coin  the  Maria  Theresa  dollar  down  to  a  very  late 
date  because  the  people  of  certain  countries  with 
which  she  trades  have  been  so  long  used  to  it  that 
they  would  use  no  other.  Similarly  the  Spanish 
silver  dollar  has  been  hard  to  displace  in  some 
parts  of  the  Orient. 

We  thus  see  that  Gresham's  law  needs  to  be 
carefully  stated  in  order  to  make  it  describe  the 
facts  accurately.  It  is  really  a  law  of  tendency, 
and  must  be  stated  hypothetically.  We  might  put 
it  thus  :  If  more  than  one  form  of  money  is  legally 
usable  in  a  country,  and  if  one  of  these  is  more 
valuable  for  some  other  use  than  it  is  for  making 
exchanges,  then  the  inferior  portion  of  the  cur- 
rency will  supplant  the  superior  to  the  extent  that 
the  two  portions  together  exceed  the  need  for  cur- 

57 


MONEY 

rency  in  the  country,  provided  that  public  opinion 
or  any  other  economic  force  does  not  interfere  with 
the  operation  of  the  self-interest  of  dealers  in 
money. 

Gresham's  law  is  really  a  limited  statement  of  a 
more  general  principle,  which  may  be  thus  formu- 
lated :  When  a  community  in  which  competition 
is  free  and  intelligent  has  a  choice  of  means  of 
payment,  it  will  use  the  least  expensive  which  will 
serve  its  purpose  under  existing  circumstances. 
Or,  still  more  generally:  In  a  community  in 
which  competition  is  free  and  intelligent  there  is  a 
constant  effort  to  perform  every  economic  service 
by  the  agency  which  yields  the  largest  net  results. 


CHAPTER   V 

SERVICES  AND  NATURE   OF  MONEY 

REFERENCES:  Hadley,  A.  T.,  Economics,  pp.  181-185  ;  Indian- 
apolis Monetary  Commission,  Report  of,  1898,  Pt.  I.,  §§  1-18;  Jevons, 
W.  S.,  Money  and  the  Mechanism  of  Exchange,  Chs.  3,  5,  6 ; 
Knies,  K.,  Das  Geld,  pp.  146-237  ;  Laughlin,  J.  L.,  Principles  of 
Money,  Ch.  I  ;  Laveleye,  E.  C.,  La  Monnaie  et  le  Bimetallisme 
International,  Ch.  2 ;  Nicholson,  J.  S.,  Money  and  Monetary 
Problems,  5th  eel.,  Pt.  L,  Ch.  2  ;  Scott,  W.  A.,  Money  and  Bank- 
ing, Ch.  i  ;  Walker,  F.,  Money,  Chs.  I,  2;  White,  H.,  Money  and 
Banking,  Ch.  I. 

1.  Definition  of  Money  determined  by  its  Services. 
—  The  word  "money,"  like  so  many  other  terms  in 
economics,  has  different  meanings,  both  in  popular 
and  in  scientific  usage.  It  is  clear  from  what  has 
been  already  said  that  no  definition  of  money  can 
be  framed  on  the  basis  of  the  material  of  which  it 
is  made.  Whatever  view  is  taken  of  the  nature  of 
money  must  be  derived  from  the  determination  of 
its  services  or  functions.  To  these  services  wre 
must  now  turn  our  attention. 

The  functions  of  money  may  be  described  as 
essential,  or  those  which  are  necessary  in  all  eco- 
nomic stages;  as  derived,  or  those  which  flow  from, 
or  are  dependent  on,  the  essential  services  ;  and  as 
contingent,  or  those  which  flow  from  the  conditions 
of  a  particular  economic  stage. 

59 


MONEY 

2.  Essential  Services  of  Money.  —  The  essential 
services  of  money  are  measurement  of  value  and  fa- 
cilitation of  exchange.  The  earliest  service  that  can 
be  called  properly  a  monetary  service  was  to  enable 
an  individual  to  buy  directly  what  he  wanted.  In 
other  words,  the  service  rendered  was  to  make  it 
unnecessary  for  each  individual  to  seek  a  buyer 
for  his  goods  in  the  quantities  that  he  had  to  sell, 
who  had  at  the  same  time  the  articles  he  wanted 
in  the  quantities  he  wished  to  buy.  The  money 
article  remedied  this  lack  of  coincidence  in  bar- 
ter. This  service  is  fundamental  whatever  the 
stage  of  economic  life,  but  is  more  important 
the  farther  the  division  of  labor  is  carried.  The 
extent  to  which  this  division  can  go,  indeed,  de- 
pends on  the  extent  of  the  "general  acceptability" 
of  money.  In  an  advanced  economy,  therefore, 
the  emphasis  must  be  laid,  so  far  as  concerns  this 
function,  on  the  fact  that  money  promotes  the 
division  of  labor  by  facilitating  the  distribution 
of  its  products.  The  money  is  a  general  exchange 
and  circulating  medium.  It  performs  this  service 
because  it  is  accepted  without  question.  It  is  taken 
because  of  the  knowledge  that  others  will  take  it  in 
turn.  There  is  no  thought  in  the  mind  of  him  who 
has  it  that  the  ability  to  part  with  it  depends  on 
the  promise  of  any  third  party  to  redeem  it,  or 
that  it  can  be  used  for  another  purpose  if  it  fails 
to  pass.  Its  success  in  doing  its  work  depends 
simply  and  solely  upon  the  fact  that  it  is  in  de- 
mand for  the  purpose  of  doing  that  work.  A 

60 


SERVICES    AND    NATURE    OF    MONEY 

person  who  accepts  money  in  discharge  of  obliga- 
tions due  him  has  no  thought  of  recourse  in  case 
of  its  failure  to  pass. 

The  second  essential  service  of  money,  that  of 
measuring  value,  is  inseparable  from  the  discharge 
of  the  first,  and  doubtless  is  as  old.  Certainly  if 
a  person  takes  a  thing  in  exchange  for  goods  which 
have  a  certain  value  to  him,  intending  to  give  away 
the  thing  he  takes  for  some  third  article,  he  natu- 
rally expects  to  get  something  that  will  cause  him 
no  loss.  He  would  not  sell  his  goods  without  com- 
paring their  value  with  the  purchasing  power  of  the 
money  in  terms  of  the  things  he  wanted  to  buy. 

There  has  been  some  dispute  as  to  the  nature 
of  this  service  of  measuring  value,  some  question 
whether  it  is  truly  a  function  of  money  to  measure 
value.  Some  writers  insist  that  money  serves  sim- 
ply as  a  common  denominator  of  value ;  that  it  is 
a  term  in  units  of  which  the  values  are  declared, 
and  does  not  in  any  true  sense  measure.  This 
position  has  arisen  partly  from  a  wrong  theory  of 
the  nature  of  value,  and  partly  from  an  effort  to 
find  room  under  this  theory  for  inconvertible  pa- 
per money,  and  other  things  which  perform  the 
functions  of  money,  but  are  said  to  have  "  no  value 
in  themselves."  It  is  argued  that  because  paper 
money  has  virtually  no  cost  of  production,  it  has, 
therefore,  no  value,  and  cannot  serve  as  a  measure 
of  value ;  that,  moreover,  all  values  are  ratios  of 
exchange,  and  that  ratios  cannot  be  measured,  al- 
though they  may  be  compared.  But  value  in  the 

61 


MONEY 

sense  of  ratio  of  exchange  is  merely  relative  value. 
If  we  use  the  word  in  this  sense,  regarding  value 
as  a  ratio  whose  numerator  is  a  number  of  units  of 
some  article  and  whose  denominator  is  the  mone- 
tary unit,  then  we  may  say  that  money  is  a  com- 
mon denominator  of  value.  In  other  words,  money 
properly  may  be  called  a  common  denominator  of 
relative  values.  But  relative  values  are  simply  the 
ratios  of  quantitative,  or  real,  values.  For  value 
is  best  conceived  of,  not  as  a  ratio,  but  as  the  quan- 
tity of  marginal  utility  of  an  economic  good.  Now 
a  quantity  may  certainly  be  measured,  but  the  unit 
of  measure  must  be  of  the  same  nature  as  the 
thing  measured  —  in  this  case,  a  selected  amount 
of  value.  The  amount  of  value  in  a  chosen  quan- 
tity of  any  article  may  be  this  unit.  Now  any 
article,  including  money,  for  which  there  is  an 
effective  demand,  has  value ;  and  consequently 
the  value  in  a  certain  amount  of  money  may  serve 
as  a  unit  of  measure  of  the  values  of  other  things. 
When,  therefore,  we  say  that  money  is  a  measure 
of  value,  we  are  using  a  short  expression  for  the 
statement  that  the  amount  of  value  in  a  unit  of 
money  may  be  taken  as  a  unit  of  measure  of  the 
value  of  goods.  We  say,  for  brevity,  that  the 
money  measures  the  value,  just  as  we  say  that  an 
arc  measures  an  angle,  although  we  know  that 
strictly  the  unit  of  measure  of  angular  space  must 
itself  be  an  angle. 

Value  is  present  in  inconvertible  paper  money 
as  truly  as  in  commodity   money,  like   gold  and 

62 


SERVICES    AND    NATURE    OF    MONEY 

silver.  Commodity  money,  however,  has  other 
than  monetary  uses.  It  has  direct  utility,  and 
therefore  value  independently  of  its  use  as 
money.  But  part  of  its  value  is  certainly  due  to 
the  demand  for  it  for  monetary  purposes.  Incon- 
vertible paper  money  has  no  direct  utility  and  no 
specific  value.  Its  value  is  derived  wholly  from 
the  demand  for  it  for  monetary  purposes.  The 
difference  between  the  two  kinds  of  money  is, 
therefore,  a  difference  in  the  bases  of  their  value. 
The  difference  is  not  that  one  has  value  and  the 
other  has  not.  Value  is  present  in  both,  and  can 
be  used  to  measure  value  in  other  things.  So  far 
as  concerns  the  fact  of  the  performance  of  the 
function,  it  makes  no  difference  that  the  value  of 
the  commodity  money  is  in  its  origin  twofold,  while 
that  of  the  paper  money  is  single. 

Money  expresses  the  value  of  other  things  in 
prices.  Price  is,  generally  speaking,  the  amount 
of  value  contained  in  goods  expressed  in  units  of 
value  of  one  article.  As  the  thing  which  is  com- 
monly used  for  the  purpose  is  money,  we  are  ac- 
customed to  think  of  price  as  the  amount  of  money 
which  a  thing  will  bring  or  which  is  necessary  to 
buy  it. 

3.  The  Derived  Functions  of  Money.  —  The  sec- 
ond class  of  the  functions  of  money  are  involved  in 
the  discharge  of  the  essential  services  that  have 
been  described.  They  are,  to  serve  as  a  standard 
of  deferred  payments,  to  transfer  value,  and  to 
store  value. 

63 


MONEY 

The  function  of  acting  as  a  medium  of  payment 
of  debts  is  not  quite  identical  with  that  of  facilitat- 
ing exchange.  An  article  may  serve  as  a  means 
of  payment  without  being  a  medium  of  general  cir- 
culation and  exchange.  Wherever  a  credit  system 
exists,  a  considerable  time  may  elapse  between  the 
creation  of  a  debt  and  its  payment.  As  it  is  al- 
ways desired  to  have  the  payment  of  a  debt  return 
an  amount  of  goods  which  will  restore  the  equities 
between  creditor  and  debtor,  if  these  have  been 
disturbed  by  changes  in  the  value  of  money,  the 
article  used  as  a  means  of  payment  serves  as  a 
standard  of  deferred  payments. 

Closely  connected  with  the  services  of  transfer- 
ring value  from  time  to  time  is  that  of  doing  so 
from  place  to  place.  Money  serves  both  for  the 
place-transfer  and  the  time-transfer  of  purchasing 
power.  Both  functions  require  that  money  shall 
serve  as  a  storer  of  value.  Objection  is  sometimes 
made  to  classing  this  as  a  money  function,  on  the 
ground  that  a  thing  which  is  storing  value  cannot 
be  serving  as  a  medium  of  exchange.  But  an  arti- 
cle cannot  act  as  a  medium  of  exchange  unless  it 
retains  its  value,  and  this  retention  of  value  through 
a  period  of  several  exchanges  is  certainly  storing 
value.  The  objection  would  limit  money  to  what 
was  in  actual  circulation.  But  is  so-called  idle 
money  not  money?  Are  the  coins  which  the  child 
has  gathered  in  his  little  box  not  money  ?  Is  money 
money  only  when  it  is  in  use  ?  To  say  this  is  to 
confuse  the  thing  with  its  service.  Steam  is  steam 

64 


SERVICES    AND    NATURE    OF    MONEY 

in  a  locomotive  cylinder  even  when  the  locomotive 
is  at  rest,  and  the  locomotive  itself,  though  stand- 
ing still,  is  yet  a  locomotive.  Surely  we  must  in- 
sist that  the  idle  gold  held  by  banks  be  called 
money,  although  for  the  time  being  it  is  only  serv- 
ing the  purpose  of  conserving  value,  until  the  time 
comes  when  its  potential  force  shall  become  active. 

Since  money  is  generally  acceptable  and  valu- 
able, it  embodies  value  in  its  most  general  form. 
To  transfer  money  is  to  transfer  generic  value,  to 
pass  over  wealth  and  capital  in  their  most  mobile 
form.  It  is  because  it  represents  generic  value 
that  money  is  a  good  storer  of  value.  Any  durable 
article  might  be  used  to  store  value,  but  it  is  the 
value  of  money  only  that  we  can  be  sure  will  keep. 
For  the  demand  for  other  things  may  fall  away, 
but  money  is  always  acceptable. 

4.  Contingent  Functions  of  Money.  —  The  con- 
tingent functions  of  money  are  those  which  arise 
from  the  characteristics  of  the  stage  of  economic 
life  in  which  it  is  used.  They  are  at  least  four 
in  number  :  the  distribution  of  social  income,  the 
equalization  of  marginal  utility  in  expenditures, 
the  furnishing  of  the  basis  of  a  credit  system,  and 
the  imparting  of  a  general  form  to  capital. 

Money  is  a  distributer  of  the  product  of  social 
industry.  Without  money,  or  its  equivalent,  the 
apportionment  of  the  product  among  the  various 
producers  would  be  impossible  in  a  stage  of  highly 
specialized  labor,  for  otherwise  each  would  have  to 
get  in  kind  his  proportion  of  everything  he  helped 

F  65 


MONEY 

to  produce.  Even  then  he  would  find  it  necessary 
to  exchange  for  other  things,  since  few  men  con- 
sume what  they  produce.  Money  enables  each  to 
get  what  he  wants. 

The  second  of  the  contingent  services  is  to  en- 
able individuals  so  to  adjust  their  expenditure  that 
each  unit  of  money  spent  shall  bring  them  goods  of 
the  same  marginal  utility,  and  thus  give  them  the 
largest  value  for  their  money.  That  is,  with  money 
each  one  can  buy  the  goods  that  afford  him  the 
largest  consumer's  surplus  of  utility.  In  this  way 
a  money  income  brings  to  most  individuals  gains 
which  are  no  man's  losses. 

Money  further  serves  as  a  basis  of  the  vast 
structure  of  modern  credit.  It  is  a  cash  reserve  to 
insure  solvency,  to  guarantee  the  payment  of  the 
balances  of  credit  transactions.  "  If  we  have  a 
proper  cash  reserve  of  money,  we  can  use  other 
things  as  media  of  exchange.  ...  If  we  have  not 
an  adequate  reserve  of  capital  in  the  form  of 
money,  no  credit  system,  however  well  devised, 
will  act  as  a  substitute."  l  The  money  itself  is  not 
intended  for  use  as  a  medium  of  payment.  It  is 
used  to  create  other  media  of  payment,  and  is  itself 
called  into  direct  use  as  such  only  when  in  the 
round  of  business  these  other  media  fail  to  balance 
one  another.  This  contingency  is  likely  to  happen 
at  any  time  and,  indeed,  is  happening  all  the  time. 
Provision  to  meet  it  is  necessary  in  order  to  prevent 
the  collapse  of  the  superstructure  of  credit  media 

1  Hadley,  "  Economics,"  p.  181. 
66 


SERVICES  AND  NATURE  OF  MONEY 

of  payment.  This  use  of  money  as  a  reserve  for 
credit  payments  has  grown  greatly  in  compara- 
tively recent  times,  and  is  due  partly  to  the  modern 
method  of  doing  business  on  borrowed  capital.  It 
manifests  itself  in  the  great  development  of  bank- 
ing which  the  past  century  has  seen.  In  earlier 
times  the  principal  form  of  credit  paper  was  the 
bill  of  exchange,  which  rested  for  its  security  on 
the  goods  it  represented.  Now  the  check,  which 
represents  the  vast  volume  of  bank  deposits,  is 
doubtless  the  most  widely  used  form  of  credit 
paper. 

5.  Money  the  Embodiment  of  Generic  Value.  — 
Finally,  modern  business  utilizes  money,  as  the 
embodiment  of  generic  value,  to  give  a  liquid  form 
to  capital.  There  is  always  a  certain  amount  of 
capital  which  is  actually,  or  potentially,  free  to 
seek  new  employment.  It  can  do  so  quickly  be- 
cause it  can  be  kept  in  a  state  of  high  mobility  in 
the  form  of  money.  Does  a  new  field  of  enter- 
prise open  ?  Money  flows  at  once  into  that  field. 
It  is  not,  of  course,  meant  that  money,  as  money, 
is  a  productive  agent.  Money  flows  into  the  field, 
in  the  sense  that  it  is  passed  in  exchange  for  ma- 
terials and  machines  which  can  be  used  in  the  new 
field.  These  either  come  from  other  uses,  or,  in  a 
brief  interval  of  time,  they  are  made  ready  for  use 
in  the  new  field.  Thus  money  extends  production 
and  exercises  an  influence  to  keep  it  at  its  maxi- 
mum. Hence  it  is  that  nowadays  a  great  aim  in 
the  business  world  is  to  get  command  over  money, 

67 


MONEY 

as  general  capital,  in  order  to  take  advantage  of 
any  opportunity  to  turn  that  capital  to  productive 
uses  in  any  direction. 

Since  money  is  the  embodiment  of  generic  value, 
it  confers  on  its  possessor  a  social  and  economic 
power  which  attaches  to  no  other  form  of  wealth. 
It  gives  him  general  command  over  the  goods  and 
services  of  others,  so  far  as  these  are  for  sale. 
His  market  is  the  whole  field  of  salable  goods, 
whereas  that  of  the  would-be  seller  of  other  articles 
is  limited.  He  has  a  certain  monopoly  advantage, 
arising  from  the  universality  and  certainty  of  the 
demand  for  money. 

6.  Definitions  of  Money.  —  These  being  the  ser- 
vices of  money,  how  shall  we  define  the  term  so 
that  it  shall  be  sufficiently  exclusive  ?  The  word 
is  used  in  various  ways,  and  it  is  quite  difficult,  if 
not  impossible,  to  frame  a  definition  which  will 
conform  to  the  different  uses  and  at  the  same  time 
satisfy  the  demands  of  logical  definition. 

In  common  usage  there  are  three  general  mean- 
ings, or  groups  of  meanings,  for  the  word  money. 
It  is  sometimes  used  to  describe  all  media  of  ex- 
change, —  gold,  silver,  paper,  checks,  bank  drafts  or 
the  deposits  which  they  represent,  commercial  bills 
of  exchange,  and  even  corporation  stocks.  These 
things  all  effect  exchanges  ;  in  a  way  they  all  relieve 
the  difficulties  of  barter.  This  definition,  however, 
is  too  inclusive.  Its  error  lies  in  including  media  of 
exchange  which  are  not  general  circulating  media. 
If  this  particular  definition  is  taken,  one  must  in- 

68 


SERVICES    AND    NATURE    OF    MONEY 

elude  several  things  which  effect  exchanges  be- 
cause those  who  accept  them  know  that  they  have 
a  recourse  to  recover  their  goods  if  these  things 
should  fail  to  pass.  These  articles  do  not  attain 
general  circulation,  they  do  not  attain  the  character 
of  media  of  exchange  because  there  is  a  demand 
for  them  for  that  purpose  primarily.  It  is  out  of 
place  to  apply  the  name  "  money  "  to  the  whole 
group  of  things  which  are  used  to  effect  exchanges 
and  make  payments.  The  medium  of  exchange  in- 
cludes money,  but  its  content  is  greater  than  that 
of  money.  All  money  can  be  medium  of  exchange  ; 
but  not  all  medium  of  exchange  is  money. 

At  the  other  extreme  is  a  group  of  definitions 
which  would  restrict  money  to  what  may  be  called 
commodity  money.  Those  who  hold  this  view  in- 
sist that  money  is  an  article  of  direct  utility,  with 
specific  value  based  on  its  direct  use  for  consump- 
tion. They  hold  that  it  must  have  value  due  to  a 
demand  for  it  for  other  than  monetary  purposes. 
The  implication  is  that  in  the  absence  of  this  other 
demand  the  article  would'  not  have  value,  and 
therefore  could  not  properly  serve  as  a  measure  of 
value.  We  have  seen,  however,  that  this  is  not 
correct,  because  the  article  has  value  if  there  is 
a  demand  for  it,  whatever  the  reason  for  that  de- 
mand. Common  usage,  moreover,  is  against  this 
use  of  the  word.  May  we  say  that  the  people  of 
the  United  States  had  no  money  between  1862  and 
1879,  because  the  metals  had  been  driven  out  of 
use  by  inconvertible  paper  ?  That  would  be  a 

69 


MONEY 

hard  saying  and  few  would  believe  it.  This  view 
of  the  nature  of  money  is  certainly  definite  and 
clear-cut,  and  capable  of  easy  definition ;  but  these 
advantages  do  not  balance  the  objection  that  com- 
mon usage  is  not  in  accord  with  it. 

Between  these  two  extremes  is  the  view  that  all 
media  of  exchange  and  payment,  whose  acceptance 
the  law  requires  in  discharge  of  debts,  may  prop- 
erly be  called  money.  Of  course  standard  money 
would  ordinarily  be  covered  by  this  definition  ;  but 
so,  also,  would  inconvertible  paper,  if  it  were  legal 
tender.  For  legal  tender  inconvertible  paper  cer- 
tainly can  measure  value  and  serve  as  a  general 
exchange  and  circulating  medium.  It  can  measure 
value  because  it  possesses  value,  derived  from  the 
demand  for  it  for  money  use.  It  is  a  general  ex- 
change and  circulating  medium ;  for,  like  com- 
modity money,  its  acceptance  does  not  depend 
upon  the  credit  of  any  individual  or  corporation. 
Both  kinds  of  money  circulate  without  reference  to 
the  possibility  of  recovering  their  value  from  the 
payer  if  they  should  fail  to  pass,  and  their  value  as 
money  depends  entirely  on  the  fact  that  they  are 
generally  acceptable  in  exchange ;  whereas  all 
forms  of  paper  currency  other  than  inconvertible 
paper  depend  for  their  value  upon  the  fact  that  if 
any  one  refuses  to  take  them  in  payment,  the  holder 
has  recourse  against  the  issuer.  This  position 
seems  sound,-  and  we  may  accordingly  limit  the 
term  "money"  to  that  part  of  the  medium  of  ex- 
change which  passes  generally  current  in  exchange 

70 


SERVICES    AND    NATURE    OF    MONEY 

and  settlement  of  debts,  without  making  the  dis- 
charge of  obligations  contingent  on  the  action  of 
a  third  party,  or  on  the  action  of  the  payer  by 
promising  redemption  if  the  money  article  does 
not  pass.  From  this  point  of  view,  legal  tender 
inconvertible  paper,  and  all  commodities  which  are 
used  as  general  circulating  and  paying  media,  are 
properly  called  money. 

7.  The  Fundamental  Cause  of  Superiority  of 
Commodity  Money.  —  Although,  logically,  legal 
tender  inconvertible  paper  is  properly  called 
money,  in  practical  use  it  is  incomparably  inferior 
to  commodity  money.  There  are  several  reasons 
for  this  inferiority,  some  of  which  we  shall  have 
to  consider  later,  when  we  are  discussing  paper 
money.  Here  it  is  sufficient  to  notice  that  its  sta- 
bility of  value  is  far  less  than  that  of  gold  or  silver. 
The  value  of  commodity  money,  the  supply  being 
approximately  fixed,  rests  upon  two  sources  of  de- 
mand, —  the  demand  for  use  as  a  commodity,  and 
the  demand  for  use  as  money.  Even  if  the  mone- 
tary use  of  the  article  should  cease,  it  would  not 
wholly  lose  its  value.  Now  inconvertible  paper 
money  derives  its  value  solely  from  the  de- 
mand for  it  for  monetary  purposes.  Its  basis  of 
demand  is,  therefore,  narrow,  and  its  value  less 
stable.  Moreover,  it  is  accepted  only  within  the 
political  circle  within  which  it  is  recognized  as 
money ;  whereas  commodity  money  is  accepted  in 
any  place  where  the  article  of  which  it  is  made  is 
used  either  for  monetary  or  for  other  purposes,  or 


MONEY 

for  both.  Of  course  it  is  conceivable  that  gold  and 
silver  might  go  out  of  fashion  and  the  demand  for 
them  fall  off.  The  likelihood  of  this,  however,  is 
infinitely  less  than  is  the  likelihood  that  a  govern- 
ment which  issues  paper  money  may  fail  to  redeem 
it  on  demand.  In  the  case  of  one  kind  of  money, 
the  basis  of  value  is  general  and  permanent ;  in  the 
case  of  the  other,  it  is  likely  to  be  contingent  upon 
the  continuance  of  the  government  that  issues  it, 
and  upon  the  economic  condition  of  that  govern- 
ment. The  instability  which  this  difference  pro- 
duces in  inconvertible  paper  is  sufficient  to  condemn 
it  as  something  which  should  never  be  resorted  to 
by  sound  and  honest  governments. 

8.  Characteristics  of  Good  Commodity  Money.  - 
We  have  seen  that  a  great  many  different  arti- 
cles have,  at  one  time  or  another,  been  used  as 
money.  There  are  certain  qualities  which  the 
article  in  use  as  commodity  money  should  possess 
in  order  to  perform  its  functions  to  the  best  advan- 
tage. These  may  be  enumerated  as  follows :  — 

(a)  It  must  in  the  first  place  be  capable  of  be- 
ing exchanged  in  all  ratios,  and  should  be  suitable 
to  make  payments  in  all  sums.  Hence  it  must  be 
easily  divisible  and  homogeneous,  so  that  its  value 
divisions  may  correspond  with  its  physical  divisions. 
Not  only  must  it  be  divisible  for  this  purpose,  but 
it  must  be,  so  to  speak,  aggregatable  ;  that  is,  por- 
tions of  it  must  be  capable  of  being  put  together 
into  a  single  mass  without  loss  of  value.  A  dia- 
mond is  certainly  divisible  ;  but  two  small  diamonds 

72 


SERVICES    AND    NATURE    OF    MONEY 

are  not  as  valuable  as  one  large  one  whose  weight 
is  equal  to  that  of  the  two,  and  if  it  were  possible 
to  fuse  two  small  diamonds  into  one  large  one,  its 
value  would  be  greater  than  the  sum  of  the  values 
of  the  two.  Neither  of  these  conditions  should 
exist  in  the  case  of  an  article  used  as  money. 

(b)  In   the   next    place,    the  article    thus   used 
must  possess  value,  in  order  that  it  may  measure 
and  store  value.     As  has  been  pointed  out,    this 
value  may  be  due  simply  to  the  demand  for  it  for 
monetary  purposes.    But  an  article  of  direct  utility, 
and,  therefore,  of  specific  value,  is  for  many  rea- 
sons preferable  to  one  whose  utility  is  merely  in- 
strumental, and  whose  value  depends  simply  on  its 
service  as  a  medium  of    exchange.     As  we  have 
seen,  it  will  have  greater  stability. 

(c]  In  the  third  place,  the  article  chosen  should 
have  a  steady  value.    That  is,  its  purchasing  power 
should  remain  reasonably  constant,  from  time  to 
time,  and  from  place  to  place.     It  must  do  this  if  it 
is  to  serve  well  for  storing  value  and  for  acting  as 
a  standard  of  deferred  payments. 

There  seems  to  be  a  certain  inconsistency  in 
speaking  of  an  article  as  a  standard  of  value  and 
as  varying  in  value.  If  an  article  is  a  standard  of 
value,  how  can  we  regard  it  as  variable  ?  There  is 
some  difficulty  in  telling  just  what  is  meant  by 
steadiness  of  value.  We  shall  see  later  that  there 
are  two  or  three  meanings  of  the  phrase,  "  variation 
of  value,"  in  this  connection.  For  our  present  pur- 
pose it  is  necessary  only  to  fix  in  mind  firmly  the 

73 


MONEY 

fact  that  variation  is  possible.  It  is  important, 
therefore,  that  it  should  be  reduced  to  a  minimum, 
and  that  the  article  selected  for  monetary  use 
should  show  as  little  of  it  as  possible.  In  other 
words,  the  purchasing  power  of  the  monetary  stand- 
ard should  not  vary  from  any  cause,  except  those 
which  arise  in  the  articles  whose  exchange  it  is 
used  to  effect.  The  perfect  money  should  not  vary 
from  causes  that  arise  in  the  conditions  of  its  own 
supply.  Of  course  it  is  not  possible  to  secure  an 
article  that  will  meet  this  condition. 

(d)  The    article  used  as  money  should  also  be 
durable,  or,  as  is  usually  said,  indestructible.     If 
it  does  not  possess  durability,  it  will  not  serve  as  a 
means  of  transfer  of  value  from  place  to  place  and 
from    time   to    time.     Moreover,  it  will   not   bear 
handling  well,  and  a  large  loss  would  be  incurred 
by  the  wear  and  tear  to  which  the  coins  are  sub- 
jected by  daily  use.     It  has  been  found  that  the 
precious  metals,  gold  and  silver,  in  their  pure  state, 
wear  away  too  rapidly  from  usage.     Coins,  there- 
fore, are  usually  made  of  a  mixture  of  one  of  these 
metals  with  some  baser  metal,    to    form  an  alloy 
which  has  the  necessary  durability. 

(e)  The  money  article  should  be  cognizable,  or 
easily  recognized.    If  it  were  not  so,  people  who  are 
ignorant  of  its  character,  or  who  do  not  see  it  fre- 
quently, would  constantly  be  subjected    to  fraud. 
Business  would  be  much  hindered  if  it  were  neces- 
sary constantly  to  test  the  article  offered  in  pay- 
ment  of   purchases  and    debts.     A   glance   must 

74 


SERVICES    AND    NATURE    OF    MONEY 

suffice,  aside  from  a  case  of  probable  fraud,  to 
satisfy  the  receiver  of  the  coin  that  it  is  composed 
of  the  genuine  metal. 

(f)  The  article  used  as  money  should  also  be 
malleable ;  that  is,  it  should  possess  the  physical 
character  suitable  for  coining  and  imprinting.     It 
must  not  be  so  brittle  as  to  break  easily,  or  to  take 
too  sharp  an  impression  under   the  die.     On  the 
other  hand,  it  must  not  be  so  soft  that  it  will  not 
retain    for   a    considerable    time    the   impression 
stamped  upon  it. 

(g)  Another    characteristic   which    the    money 
article  should    possess  is  commonly  described  by 
saying  that  it  should  have  much  value  in  small 
bulk.     By  this  is  meant  that  it  should  have  a  high 
specific  value.     The  word  high,  of  course,  is  rela- 
tive, and  must  be  interpreted  in  this  connection  to 
mean  as  high  as  the  ordinary  payments  and  in- 
comes of  a  community  call  for.     The  scale  of  in- 
comes and  purchases  in  any  place  determines  the 
value  of  the  money  in  general  use.     Copper  serves 
in  China,  whereas  gold  is  needed  in  the  United 
States.     In  each  case,  however,  the  value  of  the 
coin  is  large  for  its  bulk,  relatively  to  the  needs  of 
the  community. 

It  is  clear  from  an  enumeration  of  the  character- 
istics needed  for  good  money  that  no  one  article  is 
available  that  possesses  them  all.  The  relative  im- 
portance of  one  or  another  of  these  requisites  is 
determined  by  the  commodity  which  a  community 
uses.  Every  community  has  used  that  which  has 

75 


MONEY 

best  met  its  necessities,  that  which  has  satisfied  the 
universal  demand  more  generally  than  any  other 
article  could  do.  It  is  generally  admitted  that  the 
precious  metals  combine  in  a  higher  degree  than 
any  other  substance,  or  substances,  the  qualities 
necessary  to  make  a  good  commodity  money. 
Gold  and  silver  are  homogeneous,  divisible,  cogni- 
zable, and  malleable.  "It  is  clear,"  as  Professor 
Jevons  remarks,  "that  the  metals  far  surpass  all 
other  substances  for  purposes  of  circulation,  and  it 
is  almost  equally  clear  that  certain  metals  surpass 
all  the  other  metals  in  this  respect.  Of  gold  and 
silver  especially,  we  may  say  with  Turgot,  that,  by 
the  nature  of  things,  they  are  constituted  univer- 
sal money  independently  of  all  convention  or 
law."1 

We  may  notice  here  a  question  to  which  we  will 
find  it  necessary  to  recur.  If  a  single  substance, 
like  gold,  while  possessing  most  of  the  attributes 
necessary  to  make  good  money,  is  yet  lacking  in  the 
very  important  quality  of  steadiness  of  value,  would 
it  not  be  possible  to  use  something  else  as  a  stand- 
ard of  value  while  retaining  the  gold  as  a  medium 
of  exchange  ?  In  other  words,  could  we  not  sepa- 
rate the  functions  of  money  and  assign  different 
articles  to  perform  the  monetary  services  ?  It  is 
not  only  possible,  but,  as  we  have  seen,  we  actually 

1  Jevons,  "  Money  and  the  Mechanism  of  Exchange,"  p.  53. 
Of  course,  Turgot's  remark  can  only  mean  that  gold  and  silver,  by 
their  natural  qualities,  best  fulfil  the  requirements  of  the  money 
substance,  and  hence  need  no  law  to  compel  their  use. 

76 


SERVICES  AND  NATURE  OF  MONEY 

do  so  to  a  limited  extent.  The  article  used  as  a 
standard  may  be  different  from  the  actual  medium 
of  exchange  and  from  the  money  of  account.  Gold 
is  the  standard  in  this  country,  but  in  our  ordinary 
payments  we  use  paper,  copper,  silver,  corn,  and 
other  things. 


77 


CHAPTER  VI 

THE   MOVEMENT   AND    DISTRIBUTION    OF    METALLIC 
MONEY 

REFERENCES:  Laughlin,  J.  L.,  Principles  of  Money,  Ch.  10; 
Nicholson,  J.  S.,  Principles  of  Political  Economy,  Vol.  II.,  Ch.  26, 
§§  1 1-15  ;  Noyes,  A.  D.,  Thirty  Years  of  American  Finance,  Ch.  7; 
Raguet,  C.,  Currency  and  Banking,  Ch.  4 ;  Report  of  the  Indian- 
apolis Monetary  Convention,  pp.  145-158  ;  Mill,  J.  S.,  Principles 
of  Political  Economy,  Bk.  III.,  Ch.  21;  Ricardo,  D.,  Works 
(McCulloch's  ed.),  pp.  79-86,  263  ff.;  Walker,  F.,  Money,  Ch.  3. 

1.  Emphasis  laid  upon  the  Supply  of  Money.  - 
How  to  secure  for  their  respective  countries  what 
was  regarded  as  their  proper  share  of  the  precious 
metals,  was  long  a  matter  of  considerable  solici- 
tude to  statesmen,  and  much  legislative  ingenuity 
has  been  expended  at  various  times  to  accomplish 
this  end.  There  have  been  laws  hampering  the 
exportation  of  the  precious  metals,  or  even  forbid- 
ding it  altogether ;  and  other  laws  whose  aim  was 
to  encourage  the  importation  of  these  metals,  on 
the  supposition  that  the  more  of  them  a  country 
got,  the  richer  it  became.  We  know  now  that  this 
is  not  true  ;  yet  much  of  our  monetary  legislation 
is  still  colored  by  the  old  idea,  and  not  a  little  anx- 
iety is  felt  at  times  lest  we  may  at  some  time  fail 
to  have  on  hand  all  the  money  that  is  necessary 

78 


DISTRIBUTION   OF   METALLIC   MONEY 

to  do  business.  Nothing  is  more  certain,  however, 
than  that  a  country  with  a  sound  monetary  system 
is  sure  to  get,  and  to  retain,  its  due  proportion  of 
the  money  supply  of  the  world,  and  that  special 
efforts  to  bring  about  this  result  by  mere  legisla- 
tion are  unnecessary,  unfruitful,  and  likely  to  be 
positively  harmful. 

2.  The  Division  of  the  Precious  Metals  depends 
upon  the  Relative  Demand  of  Different  Countries.  — 
No  new  principle  of  exchange  is  involved  in  the  ex- 
planation of  the  distribution  of  the  precious  metals. 
Like  other  goods,  gold  and  silver  distribute  them- 
selves according  to  the  demand  for  them.  Wher- 
ever mostj.s_offered  for  them,  there  they  will  go. 
They  will  flow  out  from  places  where  their  value 
is  low  to  places  where  it  is  high. 

If  gold  and  silver  were  the  only  means  of  pay- 
ment in  use,  each  country  would  draw  to  itself 
a  proportion  of  the  total  supply  determined  by 
the  state  of  its  commerce  and  industry,  the 
amount  of  its  wealth,  and  the  frequency  and 
magnitude  of  its  ordinary  payments.  The  stock 
of  gold  at  any  moment,  and  any  new  supply,  will 
be  apportioned  according  to  the  relative  strength 
of  the  demands  of  different  countries  for  these 
purposes,  and  this  division  will  be  unchanged  as 
long  as  the  proportions  of  demand  remain  the 
same.  For,  since  demand  and  supply  are  in  equilib- 
rium, there  can  be  no  motive  to  get  more  money, 
or  to  part  with  any  that  is  on  hand. 

The  proportions  of  this  division  of  the  metals  are 

79 


MONEY 

independent  of  their  amount.  No  matter  what  the 
total  quantity,  the  proportion  which  each  country 
will  draw  to  itself  is  governed  entirely  by  the  strength 
of  its  demand  as  compared  with  the  total  demand. 
No  country  can  long  keep  more  than  its  due  pro- 
portion. Even  a  country  which  has  mines  cannot 
retain  the  entire  output  of  them,  but  only  such 
part  as  represents  the  ratio  of  its  need  to  the  total 
demand.  We  must  not  infer,  however,  that  because 
the  distribution  is  not  affected  by  the  total  quan- 
tity, it  is  not  a  matter  of  importance  whether  the 
amount  of  money  in  circulation  is  large  or  small ; 
for  it  is  of  great  importance  to  have  an  adequate 
amount  of  metallic  money  in  a  country.  The  point 
is  that,  whatever  the  actual  amount,  the  part  which 
each  country  gets  is  fixed  in  the  way  described. 

3.  The  Value  of  the  Precious  Metals  not  every- 
where the  Same.  —  It  is  asserted  by  the  classical 
theory  of  the  distribution  of  the  precious  metals 
that  if,  at  any  moment,  the  distribution  of  the  ex- 
isting stock  be  supposed  to  be  effected,  then  the 
metals  "  preserve  everywhere  the  same  value,"  A 
better  form  of  statement  would  be  that,  the  rela- 
tive values  of  the  metals  once  established,  any 
change  in  their  supply  will  so  distribute  itself  that 
these  relative  values  will  be  maintained.  This 
does  not  mean  that  an  ounce  of  gold  will  buy  as 
much  in  China  as  in  Germany  or  the  United 
States.  For  the  comparative  purchasing  power 
of  the  metal  in  two  places  depends,  in  part,  upon 
the  expense  of  transportation,  both  of  goods  and 

80 


DISTRIBUTION   OF  METALLIC   MONEY 

money,  on  insurance,  and  on  the  proportion  of 
goods,  not  articles  of  international  trade,  which 
enter  into  the  total  quantity  of  commodities  that  the 
gold  will  buy  in  each  country. 

There  is  one  price  level  for  goods  which  enter 
into  international  trade,  and  another  for  goods 
which  have  only  a  national  market.  The  equi- 
librium which  results  from  the  pressure  of  de- 
mand for  money  for  these  two  classes  of  goods 
may  be  called  the  national  price  level  of  a  coun- 
try. These  national  price  levels,  acting  on  one 
another,  produce  the  international,  or  world,  price 
level.  It  is  this  international  price  level  which  is 
of  consequence^  in  determining  the  distribution  of 
gold.  There  is  no  way  of  effecting  changes  in  the 
relative  monetary  holdings  of  communities  which 
have  no  trade,  or  market,  relations.  The  law  of 
distribution  implies  simply  that  the  price  level  of 
one  country  is  in  equilibrium  with  that  of  others 
with  which  it  has  trade  relations,  so  that  any  dis- 
turbance of  prices  in  either  is  likely  to  cause  a  cor- 
responding change  in  the  other. 

4.  Changes  in  Prices,  and  the  Movement  of  the 
Precious  Metals.  —  According  to  the  doctrine  laid 
down  by  Ricardo,  and  commonly  accepted  by 
writers  on  the  subject,  it  is  through  changing 
prices  that  a  country  rids  itself  of  a  surplus  of 
money,  or  supplies  a  deficiency.  If  we  suppose 
that,  at  a  chosen  moment,  the  trade  of  the  world 
is  in  such  a  state  that  the  exports  and  the  imports 
of  each  country  exactly  balance,  and  that  no  coun- 
G  81 


MONEY 

try  owes  a  debt  to  any  other,  then  there  is  no  rea- 
son to  suppose  that  the  proportions  of  the  holdings 
of  the  precious  metals  will  be  disturbed.  If,  how- 
ever, from  any  cause,  the  demand  for  the  merchan- 
dise of  one  country  increases,  so  that  higher  prices 
are  offered  for  it,  then  that  becomes  a  good  coun- 
try in  which  to  sell  goods,  and  a  poor  one  in  which 
to  buy.  Under  such  circumstances  foreign  goods 
are  imported,  in  order  to  take  advantage  of  the 
high  prices.  In  other  words,  money  has  become 
relatively  cheap,  and  therefore  tends  to  go  abroad, 
since  we  send  abroad  in  payment  of  our  foreign 
debts  the  articles  which  we  can  best  spare,  and 
which  are,  therefore,  cheapest.  The  importation  of 
goods  tends  to  make  them  abundant,  and  therefore 
prices  tend  to  fall  again.  Meanwhile  the  process  is 
reversed  in  other  countries.  Thus  an  equilibrium 
of  prices  throughout  the  world  is  reestablished,  and 
the  money  of  the  world  is  still  distributed  among 
the  nations  in  due  proportion. 

5.  Price  Changes  not  necessarily  followed  by  a 
Movement  of  Specie. — As  the  theory  is  usually 
expounded,  the  disturbing  cause  of  the  existing 
distribution  of  the  precious  metals  is  supposed  to  be 
a  new  supply  of  the  metals  from  the  mines.  This 
extra  supply,  going  into  circulation,  raises  the 
price  level  of  the  country,  foreign  goods  are  im- 
ported, and  some  of  the  metal  exported.  The  ex- 
planation is  good,  so  far  as  the  new  gold,  if  it  be 
gold,  goes  into  circulation  without  displacing  other 
media  of  exchange.  It  is  far  more  likely,  however, 

82 


DISTRIBUTION   OF   METALLIC   MONEY 

to  find  its  way  promptly  into  the  bank  reserves  of 
the  great  money  centres,  and  to  move  abroad  under 
the  influence  of  international  banking  requirements, 
without  influencing  prices  at  home. 

The  more  usual  case  is  not  that  of  a  change  in 
the  money  supply,  but  in  the  cost  and  supply  of 
articles  of  export.  When  such  a  change  occurs, 
and  prices  alter  because  of  it,  an  exportation  or 
importation  of  specie  is  not  a  necessary  conse- 
quence. Aside  from  the  expedients,  which  will 
be  discussed  later,  for  preventing  such  a  move- 
ment, it  will  not  occur  in  any  case  unless  gold 
is  the  article  which  the  country  affected  can  most 
easily  spare.  Ordinarily,  the  balance  of  trade 
will  be  restored  by  readjustments  in  the  prices  of 
exports  and  imports. 

Let  us  assume  as  strong  and  simple  a  case  as 
we  can,  in  order  to  bring  out  the  relations  in 
question.  Let  us  take  the  case  of  two  countries, 
A  and  B,  isolated  from  the  rest  of  the  world,  but 
trading  with  each  other.  Let  us  suppose  that  they 
use  the  same  kind  of  metallic  money,  and  that 
neither  employs  credit,  but  that  all  the  balances 
of  their  trade  are  settled  with  specie.  Suppose, 
now,  that,  on  account  of  decreased  cost  of  produc- 
tion, some  of  the  goods  of  country  A  become 
cheaper.  Then  the  price  level  will  fall  somewhat, 
and  goods  will  be  more  largely  exported.  Let  us 
suppose  that  the  increase  of  exports  is  such  as  to 
take  out  of  the  country  A  the  whole  amount  of 
those  goods  over  and  above  the  amount  which, 

83 


MONEY 

on  the  new  scale  of  prices,  will  necessitate  the  use 
of  the  same  volume  of  money  as  before.  There 
is,  thus  far,  no  ground  for  supposing  that  specie 
will  move  into,  or  out  of,  the  country.  The  goods 
exported  are  taken  to  country  B.  Here  these 
goods  have  been  exchanging  for  home  products 
at  certain  rates.  More  of  the  imported  articles 
are  now  offered  for  the  goods  of  the  receiving 
country  than  was  previously  the  case.  If  we 
could  assume  that  no  more  of  the  goods  of  coun- 
try B  would  be  given  for  the  imports  than  for- 
merly, we  would  be  obliged  to  admit  the  possibility 
of  a  movement  of  specie  from  B  to  A.  As  a  mat- 
ter of  fact,  a  larger  volume  of  foreign  goods  offered 
for  home  products  will  draw  out  a  larger  quantity 
of  these  products  in  exchange.  The  home  prod- 
ucts will  fall  in  price.  The  ratio  of  exchange 
will  alter  so  that  both  countries  will  get  some  of 
the  advantage  arising  from  the  lowered  cost  of  the 
goods  exported  by  A.  The  price  level  will  fall  to 
a  point  at  which  there  will  be  a  new  equilibrium 
of  exchange  between  the  imports  and  the  home 
products.  Meantime  a  larger  amount  of  goods 
has  been  sent  from  B  to  A.  The  price  level  will 
fall  there  also,  with  the  net  result  that  there  oc- 
curs a  fall  in  the  price  level  of  both  countries,  such 
that  their  average  prices  bear  to  each  other  the 
same  relation  that  existed  before,  without  any 
movement  of  specie. 

We    supposed    that   the  whole    surplus    of   the 
cheapening  goods  of  A  was  exported   to  B.     In 


DISTRIBUTION    OF   METALLIC   MONEY 

practice  this  will  hardly  be  the  case.  Such  part 
of  them  will  go  to  B  as  will  cause  the  ratio  of 
exchange  between  its  home  goods  and  its  imports 
to  come  to  an  equilibrium,  at  the  same  point  as  is 
reached  by  the  changing  ratio  of  exchange  in  the 
first  country  between  its  increasing  home  goods 
and  its  increasing  imports.  That  is,  as  before,  the 
price  levels  of  the  two  countries  will  come  to  rest 
in  a  ratio  which  will  render  unnecessary  any  change 
in  their  specie  holdings. 

The  fact  of  the  matter  is  that  specie  will  be  ex- 
ported only  if  it  is  the  cheapest  article  which  the 
importing  country  at  the  moment  possesses.  There 
is  no  ground  for  saying  that  gold  is  more  or  less 
likely  to  be  exported  than  is  any  other  article  in 
order  to  adjust  a  balance  of  international  trade. 
•The  usual  case  would  be  that  a  disturbance  in  the 
price  level  will  be  met  by  a  change  in  the  balance 
of  exports  and  imports  of  goods,  without  any  move- 
ment of  specie  at  all.  If  either  country  has  mines, 
gold  will  be  one  of  its  regular  articles  of  export; 
but  it  will  be  exported,  not  to  readjust  a  change  in 
the  price  level,  but  simply  as  part  of  the  general 
current  of  international  trade. 

Even  if  the  increase  of  a  country's  exports  were 
caused  by  the  production  of  an  entirely  new  article 
of  exportation,  we  could  not  say  with  certainty  that 
there  would  be  a  movement  of  gold  to  pay  for  it. 
For  it  might  simply  replace  articles  already  in 
use,  and  transfer  the  money  demand  for  them  to 
itself. 

85 


MONEY 

That  the  Ricardian  explanation  is  too  simple 
and  sweeping  is  evident,  again,  from  the  fact  that 
the  amount  of  money  which  it  would  be  necessary 
to  export,  in  order  to  readjust  the  general  price 
level,  would  be  a  considerable  portion  of  the  specie 
of  the  exporting  country,  but  an  infinitesimal  part 
of  that  of  the  world  at  large.  We  would  have, 
therefore,  a  large  proportional  change  in  the  specie 
holdings  of  one  country,  and  an  indefinitely  small 
one  in  those  of  other  countries.  Obviously,  if  it  re- 
quired the  exportation  of  one  thousand  ounces  of 
gold  to  adjust  a  price  change  of  two  per  cent,  in 
one  country,  it  would  take  many  times  one  thou- 
sand ounces  to  cause  a  similar  change  in  the  price 
level  of  the  world  at  large.  The  remedy  for 
the  restoration  of  the  disturbed  price  level  is  not 
adequate.  The  Ricardian  theory  applies  in  whatfc 
mathematicians  would  call  limiting  cases,  and  only 
there.  If  all  international  trade  were  carried  on 
by  means  of  direct  and  immediate  money  pay- 
ments, and  if  all  countries  used  the  same  standard 
metal,  there  would  undoubtedly  be  a  movement  of 
specie  whenever  a  general  decrease  in  the  cost 
of  production  of  goods  in  one  country  led  to  a  fall 
of  its  prices  and  an  increase  of  its  exports. 

6.  The  Ricardian  Theory  modified  by  Economic 
Friction.  —  In  the  case  of  an  exportation  of  specie 
which  is  in  fact  a  result  merely  of  the  disturbance 
of  trade  balances,  certain  assumptions  must  be 
made  in  order  that  the  explanation  may  square  with 
the  facts.  The  first  of  these  is  that  the  flow  of  gold 

86 


DISTRIBUTION   OF   METALLIC   MONEY 

and  the  adjustment  of  prices  is  immediate,  com- 
plete, and  without  expense.  In  no  case  is  this  true. 
The  flow  of  gold  is  not  immediate,  its  distribution 
not  instantaneous.  Let  us  suppose  that  a  new 
supply  of  gold  is  added  to  the  world's  stock.  Part 
of  it  will  go  for  use  in  the  arts,  and  the  rest  will  be 
devoted  to  monetary  purposes.  The  latter  portion, 
if  it  is  large,  might  take  a  long  time  to  distribute 
itself  among  the  industrial  nations  in  such  a  way 
as  to  restore  the  equilibrium  of  world  prices  ;  and 
during  the  intervening  period  there  might  be  dif- 
ferences in  the  price  level  in  different  countries. 
The  distribution  is  accomplished  only  with  appre- 
ciable intervals  in  its  flow,  by  jerks,  as  it  were,  as 
the  new  supply  passes  from  one  market  to  another, 
from  one  country  to  another.  As  Cairnes  remarks, 
"  Gold  and  silver,  like  all  other  things  which  are 
the  subjects  of  international  exchange,  possess 
local  values."  l  It  is  by  a  succession  of  operations 
on  these  local  values  that  the  distribution  is  gradu- 
ally effected. 

The  accuracy  of  the  principle  of  the  distribution 
of  the  precious  metals,  as  usually  explained,  is 
modified,  further,  by  the  fact  that  the  equableness, 
as  well  as  the  period,  of  distribution  of  a  new  sup- 
ply depends  somewhat  upon  the  place  in  which  it 
first  appears.  A  new  supply  of  gold  in  a  country 
that  is  industrially  backward,  and  in  which  banking 
facilities  are  but  little  developed,  will  flow  out  into 
the  world  less  freely  than  it  would  from  a  country 

1  Cf.  Cairnes,  "  Political  Economy,"  pp.  408-410. 
8? 


MONEY 

whose  conditions  were  the  reverse.  It  is  true, 
however,  that  this  circumstance  has  largely  lost  its 
importance  now,  because  the  different  parts  of  the 
world  are  in  much  closer  communication  than  they 
ever  were  before,  and  banking  facilities  and  con- 
nections are  far  more  general.  Notwithstanding 
this  fact,  it  costs  more  to  get  gold  to  countries  far 
from  the  mines  than  to  those  near  by.  Hence  the 
share  which  would  fall  to  a  remote  country,  accord- 
ing to  the  unmodified  principle  of  distribution, 
would  be  larger  than  it  would  actually  get,  because 
its  demand  would  be  lessened  by  the  expense  of 
securing  the  supply. 

In  the  next  place,  the  rapidity  and  the  equable- 
ness of  the  flow  of  the  precious  metals  are  affected 
somewhat  by  national,  or  local,  customs  and  prej- 
udices, as  well  as  by  legal  enactment.  The  silver 
of  Potosi  reached  the  marts  of  the  world  in  a 
different  order  and  period  from  what  it  would 
have  required  if  the  laws  of  Spain  and  the  eco- 
nomic prejudices  of  the  country  had  not  turned  it 
first  into  the  coffers  of  the  Spanish  treasury.  A 
country  whose  religious  ceremonies  lead  to  a  large 
use  of  the  precious  metals  would  part  with  a  new 
supply  from  its  mines  less  rapidly  than  would 
another  country  without  such  prejudices. 

In  the  fourth  place,  different  commodities  and 
different  employments  would  respond  to  the  influ- 
ences of  the  new  supply  of  gold  with  varying  de- 
grees of  rapidity  and  sensitiveness.  Employments 
whose  remuneration  was  strongly  influenced  by  cus- 


DISTRIBUTION   OF  METALLIC   MONEY 

torn  would  respond  slowly.  The  prices  of  goods 
would  be  found  to  be  affected  differently,  according 
as  we  considered  wholesale  or  retail  trade,  or  mar- 
kets far  from,  or  near  to,  great  centres  of  trade. 

7.  Influence  of  the  Credit  Mechanism  on  the 
Distribution  of  the  Precious  Metals. — All  these 
considerations  make  the  distribution  of  the  precious 
metals  very  different  in  fact  from  what  it  would 
be  if  the  assumptions  involved  in  the  principle  of 
distribution,  as  commonly  formulated,  were  true. 
Yet  they  do  not  invalidate  the  principle,  for  they  in 
no  wise  change  its  character,  and  it  could  easily  be 
stated  in  a  way  which  would  include  and  allow  for 
all  the  factors  of  disturbance  so  far  mentioned. 
The  case  is  far  different  when  we  examine  another 
assumption  implied  in  the  general  statement  of  the 
mode  of  distribution  ;  namely,  that  the  medium  of 
payment  is  homogeneous.  The  fact  is  quite  other- 
wise; the  medium  of  exchange  is  highly  heteroge- 
neous, and  this  heterogeneity  modifies  the  principle 
of  distribution,  not  merely  by  causing  friction,  but 
in  a  way  to  change  its  character  entirely. 

The  chief  factor  in  making  the  medium  of  ex- 
change heterogeneous,  and  in  modifying  the  prin- 
ciple of  distribution,  is  the_  cr edjt_sy s tern .  Credit 
not  only  alters  the  amount  of  the  precious  metals 
which  a  country  gets,  in  the  first  place,  but  it  acts 
as  a  buffer  against  sudden  changes  in  this  amount. 
Under  the  modern  credit  system,  a  country's  sup- 
ply of  metallic  money  docs  not  depend  more  on  its 
wealth  and  industry  and  the  frequency  and  magni- 

89 


MONEY 

tude  of  its  payments  than  on  the  extent  of  its  use 
of  credit  and  the  delicacy  and  complexity  of  its 
credit  system.  In  countries  where  the  credit  sys- 
tem is  most  highly  developed,  the  amount  of  me- 
tallic money  used  is  relatively  less  than  in  other 
countries,  despite  the  fact  that  it  is  in  the  former 
cases  that  the  total  demand  for  medium  of  ex- 
change may  be  the  greater.  The  precious  metals 
are  distributed  principally  according  to  the  need 
for  them  as  a  basis  of  credit.  The  more  complex 
the  credit  system,  the  less  metallic  money,  rela- 
tively, is  needed  for  its  support,  and  the  greater 
the  volume  of  payments  made  with  a  given  supply. 
8.  The  Effect  of  the  Use  of  Bills  of  Exchange  on 
the  Movement  of  the  Metals.  —  Not  only  does  credit 
change  the  distribution  of  metallic  money  which 
the  classical  theory  would  make,  but  it  also  renders 
unnecessary  some  changes  which  would,  in  its  ab- 
sence, occur.  According  to  the  doctrine,  a  rise  of 
prices  implies  an  excess  of  money,  and  an  export 
of  the  excess.  Now,  it  is  a  well-known  fact  that 
there  may  be  a  very  marked  change  in  the  price 
level  of  a  country,  that  the  balance  of  indebtedness 
may  be  considerably  in  its  favor,  or  considerably 
against  it,  without  its  losing  or  gaining  any  specie. 
Credit  has  supplied  the  modern  business  world 
with  certain  devices  for  the  purpose  of  making  the 
physical  transfer  of  specie  unnecessary  and  saving 
the  expense  of  it.  The  first  of  these  devices  is  the 
bill  of  exchange.  Of  course,  when  we  speak  of 
one  country's  being  in  debt  to  another,  we  mean 

90 


DISTRIBUTION   OF   METALLIC   MONEY 

that  the  business  men  of  one  owe  those  of  the 
other.  For  example,  some  people  in  England  owe 
debts  to  some  in  France,  and  vice  versa.  Let  us 
suppose  that  English  merchants  owe  French  mer- 
chants $1,000,000,  and  that  French  merchants  owe 
their  English  correspondents  $800,000  of  it  back 
again.  If  the  French  merchants  to  whom  the 
English  are  in  debt  can  have  turned  over  to  them 
in  Paris  the  $800,000  which  French  debtors  have 
to  pay,  and  if  at  the  same  time  the  English  creditor 
merchants  can  have  their  bills  paid  in  London  out 
of  the  $1,000,000  due  the  French,  then  only  the 
balance  of  $200,000  would  have  to  be  shipped  from 
London  to  Paris.  Precisely  this  process  is  effected 
by  means  of  bills  of  exchange.  The  English  cred- 
itors draw  on  their  debtors  in  Paris,  and  pay  them- 
selves by  selling  the  bills  to  English  merchants 
who  owe  money  in  Paris.  These  send  the  bills  to 
their  French  creditors,  who  collect  them  at  home. 
In  our  example  there  remains  a  balance  of 
$200,000  to  be  paid  by  the  transfer  of  specie. 
But  this  need  not  happen.  A  third  country,  say 
Germany,  may  owe  England  a  trade  balance  of 
this  amount,  while  at  the  same  time  French  mer- 
chants owe  an  equal  debt  to  their  German  cred- 
itors. The  English  merchants  need  only  draw 
bills  for  the  amount  on  Berlin  and  send  them  to 
their  French  creditors,  who  can  sell  them  to  the 
French  debtors  of  the  merchants  of  Germany. 
These  debtors  send  them  to  their  creditors  in 
Berlin,  who  collect  them  from  the  German  debtors 

91 


MONEY 

of  the  English.  If  the  balance  cannot  be  cancelled 
by  the  exchange  of  bills  among  the  three  countries, 
it  may  be  offset  by  the  debts  of  a  fourth,  or  a  fifth, 
and  so  on.  So  far  may  this  process  go  that  only 
a  very  small  amount  of  specie  may  pass  between 
different  countries  in  the  space  of  a  year  for  the 
settlement  of  international  indebtedness.  For  ex- 
ample, it  has  been  computed  that,  a  few  years  ago, 
the  settlement  of  international  trade  balances  re- 
quired about  one  dollar  to  every  seventeen  of 
commerce.1  Small  as  this  amount  is,  it  is  very 
much  larger  than  what  is  used  per  dollar  to  settle 
domestic  trade  balances. 

In  practice,  the  merchants  who  draw  bills  do  not 
seek  out  fellow  business  men  who  have  debts  to 
pay  in  the  country  on  which  the  bills  are  drawn. 
They  sell  them  to  banks  and  brokers,  and  these 
in  turn  sell  them  to  people  who  have  to  make 
remittances. 

If  the  bills  drawn  by  the  merchants  of  one  coun- 
try on  the  merchants  of  another  should  happen  to 
be  equal  in  amount  to  the  bills  drawn  by  the  mer- 
chants of  the  second  on  those  of  the  first,  there 
would  be  no  need  for  the  transfer  of  money  at  all. 
Usually,  however,  such  a  coincidence  does  not,  and 
cannot  be  expected  to,  occur.  But,  even  then,  the 
balance  may  not  be  settled  by  the  shipment  of 
money.  There  are  several  devices  known  to  the 
business  world  for  making  such  a  shipment  unnec- 
essary. In  the  first  place,  the  necessity  of  settling 

1  Muhleman,  M.,  "  Monetary  Systems  of  the  World,"  p.  168. 
92 


with  gold  may  be  obviated  by  drafts  of  merchants 
of  the  debtor  country  on  merchants  of  the  creditor 
country,  in  anticipation  of  future  transactions.  For 
example,  if  the  merchants  of  the  United  States 
owed  those  of  England  a  balance  representing  the 
excess  of  the  value  of  imports  over  exports,  they 
might,  instead  of  shipping  gold  to  London,  draw 
on  English  grain  importers,  in  anticipation  of  the 
sums  which  would  become  due  American  exporters 
of  grain  after  harvest  time.  These  bills,  in  future, 
simply  serve  to  prolong  the  period  of  credit  until  a 
time  when  settlement  can  be  made  by  the  sale  of 
goods  to  the  creditor  country. 

9.  Other  Causes  which  render  Export  of  the 
Precious  Metals  Unnecessary.  —  It  is  entirely  pos- 
sible, however,  that  such  a  use  of  bills  to  make  a 
temporary  settlement  may  fail  to  meet  the  whole 
of  the  balance  due.  Another  means  must  be 
sought,  therefore,  in  order  to  prevent  the  transfer 
of  specie.  It  might  be  done  by  buying  bankers' 
drafts,  instead  of  bills  of  exchange.  It  is  not 
uncommon  for  bankers  with  foreign  connections 
to  keep  balances  abroad,  on  which  they  sell  drafts, 
when  bills  of  exchange  are  not  sufficient  to  supply 
the  demands  of  debtors.  They  restore  their  bal- 
ances with  foreign  bankers  when  the  current  of 
indebtedness  is  reversed. 

If  both  of  these  means  fail  to  liquidate  the 
balance  of  indebtedness,  it  may  be  liquidated  by 
the  transfer  of  securities.  The  bonds  and  other 
evidences  of  indebtedness  which  have  a  world 

93 


MONEY 

market  are  readily  and  cheaply  sent  from  place  to 
place.  The  balance  of  indebtedness  due  from 
English  to  American  merchants  can  be  quickly 
and  easily  settled,  if  the  Englishmen  or  their 
agents  sell  in  the  New  York  market  securities 
equal  in  value  to  the  debt.  The  market  for  secu- 
rities is,  perhaps,  the  widest  and  most  mobile  of 
all  markets.  Hence  it  happens  that,  nowadays,  a 
balance  of  indebtedness  between  countries  is  much 
more  likely  to  cause  a  flow  of  securities  than  a  flow 
of  money  from  the  debtor  country. 

However,  it  is  conceivable  that  all  these  means 
should  fail  to  offset  the  balance  due,  so  that  it 
would  seem  necessary  to  export  or  import  some  of 
the  precious  metals.  This  need  not  happen,  how- 
ever, for  it  would  be  possible  for  the  debtor  country 
to  continue  in  debt,  or  to  pay  its  debt  by  borrow- 
ing money  from  some  third  country.  This  it 
could  do  by  offering  a  sufficiently  high  rate  of 
interest.  Indeed,  the  manipulation  of  the  rate  of 
discount  is  one  of  the  most  important  of  modern 
methods  of  regulating  the  flow  of  money.  Cred- 
itors will  continue  to  leave  their  balances  in  the 
debtor  country  if  the  latter  offers  a  sufficiently 
high  rate  for  their  use ;  but  if  their  need  for  their 
money  is  urgent,  other  people,  feeling  less  urgency, 
will  be  content  to  lend  the  debtor  country  the 
amount  which  it  has  to  pay.  Even  in  this  case, 
however,  there  may  not  be  any  actual  transfer  of 
money.  As  we  have  seen,  the  creditor  country 
may  be  debtor  to  a  third  country,  and  may  pay  its 

94 


DISTRIBUTION    OF   METALLIC   MONEY 

debts  to  the  third  country  by  drafts  upon  its  own 
debtor ;  while  the  third  country,  influenced  by  the 
high  rate  of  discount,  may  not  demand  the  pay- 
ment of  these  drafts  at  once.1 

From  all  these  considerations,  it  is  very  clear 
that  the  flow  of  the  precious  metals  from  one 
country  to  another  is  by  no  means  so  ready  and 
complete  as  the  Ricardian  doctrine,  in  its  bald 
form,  would  indicate.  By  the  devices  described,  a 
country  may  even  for  a  time  hold  its  supply  of 
money  at  a  level  relatively  higher  than  that  of  the 
world  at  large  ;  and  during  that  time  many  con- 
sequences of  great  importance  to  individuals  and 
classes  may  occur,  because  of  the  difference  in 
level. 

The  mode  of  distribution  of  metallic  money, 
which  has  been  described  as  applicable  to  the 
passage  of  such  money  from  country  to  country, 
describes  also  its  passage  from  place  to  place 
within  the  limits  of  a  single  country.  We  find 
the  mutual  balance  of  trade  and  of  general  in- 
debtedness of  Chicago  and  New  York,  for  example, 
adjusted  by  means  of  direct  bills  on  each  other, 
or  on  some  third  place,  by  bank  drafts,  bills  in 
futuro,  postponed  payment,  and,  in  the  last  resort, 
the  transfer  of  specie, 

10.  The  Usual  Causes  of  the  Movement  of 
Specie.  —  If  a  disturbance  of  credit  occurs,  mak- 
ing the  uncancelled  balance  of  credit  transactions 

1  Cf,  Goshen,  "The  Foreign  Exchanges,"  I5th  ed.,  pp.  129,  136, 
138. 

95 


MONEY 

larger  than  usual,  a  larger  banking  reserve  will  be 
necessary,  and  an  importation  of  specie  will  very 
likely  take  place.  The  movement  of  gold  will  be 
brought  about  by  a  rise  of  the  rate  of  discount,  or 
by  the  transfer  of  securities,  without  affecting  the 
price  level  or  the  current  of  trade  at  all.  On  the 
other  hand,  an  improvement  of  the  banking  system 
of  a  country  may  cause  an  export  of  specie.  For 
the  improvement  implies  that  the  country  can  now 
do  its  business  with  a  smaller  metallic  reserve. 

Again,  a  transfer  of  specie  from  one  country  to 
another  may  be  caused  by  a  change  in  the  ratio  of 
exchange  between  gold  and  silver  if  the  countries 
in  question  have  different  monetary  standards.  In 
such  a  case,  a  rise  of  silver  in  terms  of  gold  will 
exert  an  adverse  influence  on  the  export  trade  of 
the  silver  standard  country.  For,  at  the  same 
price  level,  exports  of  its  goods  bring  the  same 
amount  of  gold  as  before ;  but  this  amount  now 
exchanges  for  less  silver  at  home.  Hence  the  ex- 
ports of  goods  from  the  silver  standard  country  will 
fall  off,  and  its  imports  increase,  as  will  its  export 
of  silver.  The  net  result  of  these  movements  will 
be  a  fall  of  prices.  This  fall  will  go  on  until  it  off- 
sets the  change  in  the  gold  price  of  silver.  Then 
the  export  of  silver  will  stop. 

A  permanent  growth  of  the  home  trade  of  a 
country  will  necessitate  a  larger  amount  of  specie 
and  cause  its  importation  if  the  banking  system  is 
already  supplying  all  the  currency  which  its  pres- 
ent specie  holdings  permit. 

96 


11.  The  Amount  of  Money  needed  by  a  Coun- 
try. —  Closely  connected  with  this  matter  of  the 
distribution  of  the  precious  metals  for  monetary 
purposes  is  the  question  how  much  money  a  coun- 
try needs.  The  doctrine  which  we  have  just  dis- 
cussed tells  us  something  about  the  method  of 
division  of  the  money  supply  among  the  nations 
of  the  earth,  but  it  says  nothing  at  all  definite  of 
the  absolute  amount  of  money  that  a  country  should 
have.  There  is  no  known  way  of  telling  before- 
hand how  much  money  a  country  needs.  The 
amount  depends  upon  the  population,  the  total 
amount  of  business,  the  amount  of  transactions 
done  by  barter  and  credit,  the  so-called  rapidity  of 
the  circulation  of  money,  the  magnitude  of  the 
country's  productive  enterprises,  the  development 
.of  transportation  and  communication,  the  methods 
of  doing  business,  and  general  enlightenment.  The 
population  of  one  country  may  use  only  a  frac- 
tional part  of  the  money  used  by  the  same  popula- 
tion in  another  country.  France,  with  a  population 
approximately  that  of  England,  uses  a  considerably 
larger  amount  of  money  to  do  her  business.  If 
productive  enterprise  is  great,  larger  money  re- 
serves are  needed,  as  is  also  a  larger  amount  of 
money  for  the  payment  of  wages.  If  a  million 
people  are  crowded  together  within  the  limits  of  a 
city,  so  that  communication  is  easy  and  rapid,  they 
need  less  money  for  a  given  volume  of  business 
than  if  they  are  scattered  over  a  wide  territory. 
If  the  banking  habit  is  highly  developed,  if  the 
H  97 


MONEY 

standard  of  personal  and  business  integrity  is  high, 
so  that  confidence  is  general,  business  settlements 
will  be  made  largely  with  credit  paper,  and  less 
money  will  be  needed.  It  seems  a  hopeless  task 
to  try  to  determine  either  the  influences  of  these 
various  causes,  or  their  mutual  relations.  We  may 
say  with  confidence  that,  "  other  things  remaining 
the  same,"  the  amount  of  money  used  will  vary 
with  any  one  of  the  other  factors  we  have  men- 
tioned. But  that  is  all. 

Must  we,  then,  abandon  the  attempt  to  reach 
any  definite  conclusions  on  this  question  ?  Of  the 
actual  quantity  of  money  needed  and  the  amount 
of  its  variation  from  time  to  time — yes;  on  the 
mode  and  causes  of  those  variations,  however,  we 
may  get  a  little  light.  This  subject  we  proceed  to 
discuss. 


98 


CHAPTER  VII 

THE  STATIC  DISTRIBUTION  OF  THE  PRECIOUS 
METALS 

REFERENCES  :  Jevons,  W.  S.,  Money  and  the  Mechanism  of  Ex- 
change, Ch.  26 ;  Kleinwachter,  F.,  Lehrbuch  der  Nationaloekono- 
mie,  pp.  343-346;  Laughlin,  J.  L.,  Principles  of  Money,  Ch.  II  ; 
Tucker,  G.,  Theory  of  Money  and  Banks,  Ch.  5  ;  Walker,  F.  A., 
Money,  pp.  48-49,  57-63,  73-74. 

1.  Distribution  of  Money  in  the  Sense  of  Appor- 
tionment.—  The  phrase,  "distribution  of  money," 
admits  of  a  double  meaning.  It  may  signify 
either  the  movement  of  money  from  place  to  place, 
or  the  division  of  the  existing  quantity  among  dif- 
ferent countries  or  groups  of  people.  It  is  in  the 
latter  sense  that  the  subject  has  always  aroused 
the  greater  popular  interest ;  but  it  is  in  the  other 
sense  that  it  has  received  the  fuller  scientific  treat- 
ment. How  much  money  a  community  uses, 
absolutely,  or  in  comparison  with  other  communi- 
ties of  the  same  general  economic  character ; 
what  is  the  composition  of  its  medium  of  pay- 
ment ;  what  proportion  of  its  payments  are  made 
with  money  and  what  by  means  of  credit ;  and 
how,  as  a  community  grows,  the  constituents  of 
its  medium  of  exchange  alter  with  reference  to 
one  another  —  are  questions  of  much  interest  and 

99 


MONEY 

importance,  which  the  classical  theory  of  distribu- 
tion does  not  touch,  and  to  which  our  existing 
knowledge  offers  us  unsatisfactory  answers,  if, 
indeed,  it  offers  any  at  all. 

2.  Conditions  of  the  Apportionment.  —  We  usu- 
ally feel  obliged  to  content  ourselves  with  saying 
that  the  amount  of  money  which  is  used  by  a  com- 
munity depends  on  its  population,  the  amount  and 
character  of  its  business,  the  general  range  of 
prices,  the  degree  of  perfection  of  its  credit 
machinery,  and  the  extent  to  which  credit  is  used. 
Just  what  relations  exist  between  the  quantity  of 
money  needed  and  each  of  the  other  factors  men- 
tioned, we  cannot  say.  In  many  popular  discus- 
sions, and  in  some  scientific  ones,  the  relation 
seems  to  be  regarded  as  one  of  simple  proportion. 
It  is  often  taken  for  granted  that  twice  or  thrice 
as  many  people  will  require  twice  or  thrice  as 
much  money,  "  other  things  remaining  the  same  "  ; 
that  a  community  with  twice  or  thrice  as  much 
business  as  another  will  use  a  proportionally 
larger  amount  of  money.  Such,  however,  is  not 
the  way  of  life.  Increase  in  population  and 
growth  in  volume  of  business  imply  a  more  intense 
economic  activity,  and  not  merely  a  quantitative 
increase  of  the  economic  organs.  If  the  quantity 
of  money  changes,  other  things  cannot  remain  the 
same.  Even  in  a  purely  monetary  milieu,  one 
from  which  credit  and  its  complexity  of  conse- 
quences were  absent,  the  simple  solution  offered 
could  hardly  apply ;  and  if  it  did,  there  would  be 

100 


AMOUNT  OF  METALLIC  MONEY  NEEDED 

no  way  of  making  the  necessary  allowances  for 
the  introduction  of  a  system  of  credit.  For  we 
have  to  do  with  a  complex  of  forces,  whose  opera- 
tions are  so  interdependent  that  we  cannot  detect 
and  trace  the  course  of  any  one  of  them  singly. 
The  conditions  of  the  problem  make  it  impossible 
to  get  at  the  exact  relation  between  population  or 
volume  of  business  and  the  quantity  of  medium  of 
exchange ;  but  it  is  possible,  perhaps,  to  describe 
the  character  of  that  relation  somewhat  more 
specifically  than  is  done  in  the  general  statements 
commonly  made  about  it. 

3.  An  Increased  Volume  of  Exchanges  requires 
Larger  or  More  Efficient  Medium  of  Exchange,  but 
not  necessarily  More  Money.  —  An  increase  in  the 
volume  of  business  necessitates  an  increase  in  the 
volume  of  the  medium  of  exchange,  or  a  greater 
efficiency  in  the  system  of  exchange.  While,  in 
the  long  run,  this  usually  implies,  as  we  shall  see, 
an  increase  in  the  quantity  of  money  available,  it 
does  not  necessitate  such  an  increase  at  once,  nor, 
possibly,  for  a  considerable  period  of  time,  because 
there  are  several  ways  of  effecting  an  enhanced 
volume  of  exchanges  other  than  by  increasing  the 
amount  of  money  in  use.  It  may  be  done  by 
changing  the  price  level,  or  by  an  extension  of 
barter,  or  by  an  improvement  of  the  credit  system 
either  through  its  extension  or  its  refinement,  or 
by  a  higher  efficiency,  commonly  called  rapidity 
of  circulation,  of  money,  due  to  improved  means 
of  communication  or  transportation. 
101 


MONEY 

When  there  exist  several  ways  of  meeting  an  in- 
crease in  the  demand  for  means  of  exchange,  that 
one  will  be  chosen  which  is,  for  the  time  and  under 
the  circumstances,  the  least  costly.  Some  impor- 
tant consequences  follow  from  this  general  princi- 
ple. In  the  first  place,  if  the  volume  of  exchanges 
to  be  effected  increases,  the  business  will  be  done 
and  the  changes  made  with  the  existing  volume 
of  money,  on  a  lower  level  of  prices,  if  the  difficul- 
ties of  barter  or  the  expense  of  extending  the 
credit  system  be  too  great  to  warrant  resort  to 
either  of  these  means  of  effecting  exchanges ;  or 
if  the  difficulties  in  the  way  of  improving  transpor- 
tation and  communication  make  it,  for  the  time, 
impracticable  to  increase  the  efficiency  of  the  ex- 
isting supply  of  money.  Since  a  new  supply  of 
metallic  money  can  always  be  had  at  some  price, 
the  fact  that  the  community  does  not  seek  or  get 
this  supply  is  the  best  of  evidence  that  it  is  less 
costly  to  do  the  business  on  a  lower  level  of  prices, 
and  suffer  whatever  loss  that  change  entails,  than 
to  incur  the  expense  of  adding  to  the  supply  of 
metallic  money.  The  periods  of  falling  prices, 
from  1848  to  1860,  and  1873  to  1896,  are  really  to 
be  explained  in  this  way.  There  never  was  any 
good  evidence  that  the  supply  of  gold  commer- 
cially available  was  exhausted.  The  real  meaning 
of  the  situation  was  that  the  cost  of  getting  gold, 
under  the  conditions  of  mining  which  then  pre- 
vailed, was  greater  than  the  loss  entailed  for  the 
world  by  falling  price  levels.  When  this  loss  be- 


AMOUNT  OF  METALLIC  MONEY  NEEDED 

came  great  enough  to  make  the  extension  of  gold 
mining  under  the  old  conditions  once  more  profit- 
able, and,  still  more,  to  make  it  profitable  to  seek 
new  processes  of  extracting  the  metal,  capital  was 
turned  from  other  uses  to  gold  production,  and  the 
supply  of  that  metal  has,  in  consequence,  rapidly 
increased. 

If  the  expense  of  getting  new  gold  is  very  large, 
and  if  the  credit  system  is  not  sufficiently  expan- 
sible, a  resort  to  direct  barter  may  be  less  costly 
to  the  community  than  a  falling  price  level.  It 
is  somewhat  difficult  to  give  historical  illustrations 
of  the  enlarged  use  of  barter  in  a  community  which 
has  become  accustomed  to  the  use  of  money ;  yet 
there  is  reason  for  thinking  that  under  a  regime 
of  fiat  paper,  issued  in  excess,  some  communities 
have  preferred  to  enlarge  the  amount  of  their  ex- 
changes performed  in  this  way,  rather  than  run 
the  risk  of  further  loss  by  depreciation.  It  is  diffi- 
cult, too,  to  offer  direct  evidence  of  an  increase  in 
what  is  usually  called  the  rapidity  of  circulation  of 
money.  Yet  we  know  that  in  monetary  stringencies 
and  crises  money  is  hoarded,  or  circulates  less 
rapidly  than  usual,  especially  in  rural  commu- 
nities ;  whereas,  when  business  is  good  and  prices 
are  rising,  money  payments  are  much  easier  and 
more  frequent,  and  a  given  quantity  of  money 
performs  a  larger  volume  of  payments,  while  at 
the  same  time  the  volume  of  credit  enlarges.  It 
is  difficult  to  trace  any  one  of  these  movements 
separately,  because  in  the  complex  system  of  ex- 

103 


MONEY 

change  of  a  modern  community  more  than  one  of 
these  means  of  meeting  an  increased  demand  for 
means  of  payment  are  likely  to  be  resorted  to  at 
the  same  time.  The  total  result,  however,  is  to 
give  the  community,  through  the  play  of  compe- 
tition, the  least  expensive  mode  of  meeting  the 
demand  which  the  conditions  for  the  time  permit. 
Consequently,  an  additional  quantity  of  money 
may  not  be  brought  into  use  by  the  demand  for 
an  increased  means  of  payment,  and  the  relation 
between  the  quantity  of  money  and  the  volume  of 
business  is,  therefore,  by  no  means  one  of  simple 
proportion. 

4.  The  Amount  of  Metallic  Money  in  a  Country 
tends  to  a  Minimum.  — A  second  important  conse- 
quence of  the  general  principle  that  the  community 
will  make  its  payments  by  the  method  which  is  for 
the  time  the  least  expensive,  is  the  tendency  of  a 
country  to  reduce  its  holdings  of  metallic  money  to 
a  minimum.  It  is  not,  as  a  rule,  advantageous,  but 
wasteful,  for  a  community  to  accumulate  metallic 
money  beyond  the  amount  brought  to  it  by  the 
.ordinary  operations  of  business.  For  it  is  usually 
more  expensive  to  increase  the  supply  of  gold  than 
to  meet  the  additional  payments  by  some  other 
means,  because,  in  order  to  increase  this  supply, 
real  capital  must  ordinarily  be  diverted  from  some 
other  use.  Hence,  no  commercial  community  will 
incur  for  long  the  expense  of  keeping  more  gold 
than  is  necessary  to  perform  its  direct  money  pay- 
ments and  to  sustain  its  credit  system.  The  truth 

104 


AMOUNT  OF  METALLIC  MONEY  NEEDED 

of  this  statement  is  most  evident  in  the  case  of  a 
new  country.  The  people  of  a  new  community 
always  try  to  get  on  without  metallic  money.  This 
is  the  explanation  of  the  attempts  in  our  own  coun- 
try, in  the  early  days,  to  circulate  a  large  volume 
of  paper  money.  It  was  an  effort  on  the  part  of 
the  community  to  do  its  business  without  turning 
any  of  its  real  capital  to  the  production  of  metallic 
money,  because  its  real  capital  was  employed,  or 
was  thought  to  be  employed,  in  more  profitable 
ways.  Under  a  system  of  purely  metallic  money, 
this  tendency  of  each  country  to  reduce  its  hold- 
ings to  a  profitable  minimum  would  show  itself  in 
the  physical  transfer  of  its  surplus.  Such  trans- 
fers do  not  cease,  of  course,  under  the  modern  sys- 
tem of  credit  exchange,  but  they  are,  perhaps,  less 
frequent  than  they  would  be  in  the  absence  of 
credit.  What  is  transferred  now  is  usually  not 
the  money,  but  the  claims  to  money.  The  trans- 
fer, therefore,  is  not  a  physical  one,  but  a  transfer 
of  paper  evidences  of  ownership. 

5.  Readjustments  in  the  Exchange  System  caused 
by  a  Demand  for  More  Medium  of  Exchange.  —  A 
demand  for  a  more  adequate  means  of  exchange 
usually  is  met  first  by  an  adjustment  of  the  mechan- 
ism of  credit,  and  a  study  of  some  phases  of  credit, 
especially  of  the  proportions  in  which  it  enters 
into  payments  for  different  population  groups 
and  volumes  of  business,  will  throw  a  good  deal  of 
light  on  the  amount  of  money  used  as  population 
and  business  grow.  If  credit  is  well  developed  in 

I05 


MONEY 

a  community,  if  a  good  credit  system  is  in  existence, 
so  that  the  people  have  what  may  be  called  the 
credit  habit,  they  will  resort  readily  and  easily  to 
an  extension  of  credit  to  meet  the  changed  demand 
for  means  to  effect  exchanges.  They  will  increase 
and  improve  their  credit  machinery  through  con- 
siderable periods  of  time,  if  necessary,  to  avoid 
the  expense  of  adding  more  metallic  money  to  their 
circulation.  For  the  credit  system,  in  the  last 
analysis,  is  a  labor-saving  device.  Like  new 
machinery  or  improved  processes,  it  can  be  used 
profitably  only  when  the  operations  of  business  are 
large  enough  to  furnish  a  sufficient  demand  for  its 
product.  Within  limits,  the  extension  of  the  credit 
system  is  less  expensive  than  the  devotion  of  real 
capital  to  the  production  of  an  increased  supply  of 
gold.  Accordingly,  as  an  increased  portion  of 
business  calls  for  a  larger  medium  of  exchange, 
the  first  effort  will  be  to  use  the  existing  mechanism 
to  its  fullest  capacity.  The  bank  which  served 
three,  thousand  people,  and  did  the  business  they 
furnished,  will  be  made  to  serve  six  or  ten  thou- 
sand people,  without  increasing  its  real  capital. 
Banks  will  establish  branches  to  avoid  the  neces- 
sity of  duplicating  capital.  They  will  consolidate 
to  avoid  such  duplication,  to  economize  in  admin- 
istration in  order  to  withstand  shocks,  and  in  other 
ways  try  to  bring  the  exchange  efficiency  of  the 
money  which  constitutes  their  real  capital  to  its 
maximum.  This  country  in  recent  years  has  been 
passing  through  such  an  experience.  No  other 

106 


AMOUNT  OF  METALLIC  MONEY  NEEDED 

significance  can  be  attached  to  the  increase  in  the 
number  of  national  banks  from  3590,  in  1899,  to 
4756,  in  1903  ;  and  to  the  rapid  multiplication  of 
such  banks  with  the  minimum  capital  allowed  by 
law,  in  rural  communities  where  banking  facilities 
did  not  exist  before  ;  to  say  nothing  of  the  increase 
of  banking  institutions  under  other  than  national 
charters.  Nor  can  there  be  any  other  economic 
meaning  to  the  tremendous  consolidations  of  great 
banking  houses  which  the  past  few  years  have 
seen.  All  these  phenomena  mean  only  that  credit 
is  playing  for  the  time  a  larger  role ;  that  the  por- 
tion of  the  volume  of  business  effected  by  credit 
is  for  the  time  larger  than  before,  and  the  amount 
of  money  smaller  in  proportion  to  the  total  volume 
of  transactions.  It  is  impossible,  of  course,  to  find 
direct  evidence  of  this.  No  one  knows  the  exact 
amount  of  metallic  money  in  a  country  or  in  the 
world,  nor  is  it  possible  to  tell  either  the  number 
of  exchanges  or  the  total  volume  of  business  at 
any  time  or  through  any  period.  The  volume  of 
metallic  money  undoubtedly  has  grown  rapidly  in 
the  past  few  years.  There  are  signs,  however, 
that  it  has  not  grown  so  rapidly  as  has  the  total 
volume  of  business. 

While  growing  population  and  increase  of  busi- 
ness make  necessary  a  resort  to  a  larger  use  of 
credit,  both  relatively  and  absolutely,  they  at  the 
same  time  furnish  certain  social  conditions  which 
make  the  use  of  credit  easier.  Increasing  popu- 
lation implies  greater  density,  greater  complexity 
107 


MONEY 

of  business  relations,  more  extended  economic 
interdependence  —  conditions  all  of  which  may 
be  described  briefly  as  greater  economic  solidarity. 
These  changes  broaden  and  deepen  that  mutual 
knowledge  and  confidence  which  form  the  basis 
of  all  credit  transactions,  and  so  stimulate  the 
growth  of  credit,  while  at  the  same  time  improved 
means  of  communication  and  transportation  facili- 
tate its  use. 

We  conclude  from  all  the  circumstances  that, 
where  credit  is  freely  used,  where  a  well-developed 
credit  system  exists,  the  proportion  of  credit  pay- 
ments to  the  whole  volume  of  business  increases, 
on  the  whole,  as  population  and  business  grow, 
and  that  the  amount  of  metallic  money  actually 
needed  becomes  less  in  proportion  to  the  total 
volume  of  payments. 

6.  The  Extension  of  Credit  Exchange  slower  as 
the  Volume  of  Exchanges  Increases.  —  The  exten- 
sion and  refinement  of  the  credit  economy  cannot 
be  carried  on  indefinitely,  however.  There  is  some 
point  beyond  which  the  extension  cannot  be  car- 
ried profitably.  There  is  some  density  of  popula- 
tion, some  volume  of  business,  whose  demands 
cannot  be  completely  satisfied  in  this  way.  Be- 
yond this  point  an  extension  of  the  credit  means 
of  payment  must  be  retarded,  and  the  amount  of 
money  put  into  use  as  compared  with  the  whole 
volume  of  business  must  become  larger.  There 
are  several  reasons  for  holding  this  view.  The 
first  argument  to  prove  this  slowing  up  of  the  in- 

108 


AMOUNT  OF  METALLIC  MONEY  NEEDED 

creasing  use  of  credit  in  making  payments  rests 
upon  the  necessities  of  arithmetic.  For  not  all 
exchanges  are  effected  by  credit.  The  percentage 
of  credit  paper  in  the  medium  of  payment  cannot 
exceed  100.  If,  for  any  volume  of  business,  the 
percentage  of  payments  made  by  means  of  credit 
is  60,  this  percentage  cannot  multiply  proportion- 
ally with  the  increase  in  the  volume  of  payments. 
If  the  volume  of  payments  multiplies  ten  times, 
the  total  amount  paid  by  means  of  credit  paper 
may  also  multiply  ten  times,  but  the  percentage  of 
credit  payments  cannot  do  so.  To  speak  alge- 
braically, the  value  of  the  ordinate,  Y,  cannot 
exceed  100,  while  that  of  the  abscissa,  X,  may 
be  indefinitely  large.  After  a  time  the  curve 
showing  the  percentage  of  credit  payments  to 
all  payments  must,  under  these  conditions,  tend 
to  become  parallel  to  the  axis  of  X. 

The  second  reason  for  thinking  that  there  is  a 
point  beyond  which  the  extension  of  credit  goes  on 
more  slowly  than  before  is  found  in  the  conditions 
of  the  increase  of  business.  If  we  assume  that  at 
any  time  the  exchanges  of  a  country  are  effected 
by  means  of  a  certain  proportion  of  credit  paper 
and  a  certain  proportion  of  metallic  money,  and 
that  the  credit  system  is  extended  to  its  point  of 
maximum  efficiency,  new  increments  of  business 
are  likely  to  be  carried  on  outside  of  the  credit 
system,  that  is,  by  means  of  direct  money  pay- 
ments. There  is,  so  to  say,  a  unit  of  operation 
in  the  credit  mechanism,  a  certain  portion  of  the 

109 


MONEY 

credit  machinery,  a  certain  group  of  operations 
which  must  be  put  in  motion  if  the  machinery  of 
credit  is  used  at  aH  to  effect  a  given  transaction. 
If  a  new  increment  of  exchanges  is  less  than  this 
unit  will  perform,  it  cannot  profitably  be  done  by 
credit.  The  railroads  of  the  country  of  late  years 
have  been  increasing  the  size  of  their  locomotives, 
until  now  it  is  a  question  whether  the  point  of  de- 
crease of  profitableness  in  size  and  hauling  capacity 
has  not  been  reached.  It  certainly  is  not  profit- 
able to  increase  the  power  of  locomotives  beyond 
what  is  necessary  to  do  the  amount  of  hauling 
which  they  will  ordinarily  be  called  upon  to  do. 
Similarly  the  credit  machinery,  when  it  has  become 
vast  and  intricate,  is  not  applicable  to  small  ex- 
changes. They  must  be  cared  for  by  an  additional 
supply  of  money.  Proof  of  this  statement  is  found 
in  the  way  whereby  clearing-house  balances  are 
settled  in  different  places.  In  New  York,  for  ex- 
ample, money  is  used  to  a  larger  extent  for  this 
purpose  than  in  many  smaller  cities.  Some  years 
ago,  when  statistics  were  collected  concerning  the 
proportion  of  credit  paper  in  bank  deposits,  the 
statistics  of  clearing-house  operations  were  asked 
for,  including  the  method  of  settling  balances. 
The  returns  showed  that  a  larger  proportion  of 
the  balance  was  paid  in  money  in  New  York  City 
than  in  most  of  the  smaller  cities.1  New  York 
used  $2,971,000  in  United  States  notes,  and 
$3.95o,ooo  in  United  States  currency  certificates 

1  Cf.  Report  of  the  Comptroller  of  the  Currency,  1896,  p.  98. 
110 


AMOUNT  OF  METALLIC  MONEY  NEEDED 

to  settle  her  balance  of  $6,921,000  on  the  day  in 
question.  Atlanta,  Georgia,  Denver,  Colorado,  Lou- 
isville, Kentucky,  and  many  other  places  paid  their 
clearing-house  balances  entirely  by  manager's 
checks.  Yet  it  is  in  New  York  City  that  credit 
machinery  is  most  delicate  and  extended,  and 
where,  therefore,  one  would  expect  at  first  thought 
to  find  the  use  of  money  for  this  purpose  most 
completely  eliminated.  The  explanation  is  very 
simple,  and  is  found  in  the  fact  that  the  more  com- 
plex and  delicate  the  credit  machinery,  the  larger 
the  minimum  debt  which  it  will  pay  to  discharge 
by  its  means ;  the  larger,  that  is,  will  be  the  bal- 
ance of  payments  made  with  money.  In  a  small 
place,  with  a  single  bank,  whose  bookkeeping  is 
simple  and  whose  office  expenses  are  small,  it  may 
pay  to  handle  checks  for  so  small  an  amount  as  a 
dollar,  or  even  fifty  cents.  There  is  no  clearing- 
house process  to  go  through,  no  duplication  of 
transfers  and  other  records.  The  case  is  quite 
different  in  the  great  credit  centres.  The  credit 
machinery  of  New  York  is  too  costly  to  use  on 
sums  so  small.  It  is  easier  and  less  expensive  to 
make  such  payments  in  money,.  Similarly,  as  the 
business  of  a  community  becomes  larger,  there  is  a 
considerable  portion  of  it  whose  settlement  is  more 
cheaply  made  with  ready  money  than  by  the  costly 
credit  mechanism.  For,  as  population  grows,  an 
increasing  proportion  of  it  is  made  up  of  people  of 
small  means  —  people  who  have  small  incomes  and 
make  small  purchases.  These  small  purchases  are 


MONEY 

more  likely  to  be  made  with  ready  money.  Neither 
the  income  nor  the  ordinary  expenditures  of  indi- 
viduals in  this  group  of  population  admit  of  the 
profitable  use  of  the  credit  machinery.  Small  and 
frequent  purchases  for  ready  money  become  more 
common  and  form  a  larger  total.  The  increase  in 
the  number  of  small  stores,  as  a  community  grows 
in  population,  is  evidence  of  this  new  demand  for 
ready  money.  The  ease  with  which  they  enable 
the  individual  to  buy  at  a  moment's  notice  just  as 
much  of  any  goods  as  he  needs,  promotes  small 
and  frequent  purchases  and  stimulates  ready 
money  payments.  Under  these  circumstances 
people  need  not  buy  their  household  necessaries 
so  far  ahead,  and  therefore  need  not  buy  so  largely 
at  a  time.  In  the  ordinary  family  in  this  country, 
for  example,  the  buying  of  necessaries  is,  without 
doubt,  done  less  from  month  to  month  and  more 
from  week  to  week,  or  even  from  day  to  day,  than 
used  to  be  the  case.  The  changed  conditions  call 
for  a  larger  amount  of  ready  money. 

7.  Other  Conditions  which  retard  the  Growth  of 
Credit  Exchanges.  —  There  is,  too,  a  growing  ten- 
dency to  shorten  the  period  of  payment  of  wages 
and  salaries.  Hence  the  recipients  get  smaller 
sums  at  a  time  and  the  disbursement  of  money  is 
less  difficult.  Many  who  bought  on  credit  when 
the  wage  or  salary  period  was  a  quarter  year  or  a 
month  will  buy  for  cash  when  the  period  is  only 
a  week  ;  and  since  the  payments  arc  smaller, 
money  is  more  convenient  than  checks.  This 

112 


AMOUNT  OF  METALLIC  MONEY  NEEDED 

greater  use  of  money  as  incomes  become  smaller 
or  more  frequently  paid  is  a  matter  concerning 
which  it  is  very  difficult  to  get  any  direct  evidence. 
From  one  source,  however,  we  get  a  little  light. 
The  smaller  purchases  and  payments  must  make 
necessary  a  greater  use  of  money  of  the  lower  de- 
nominations. Now  there  is  some  evidence  that  the 
proportion  of  the  lowerclenominations  in  circulation 
grows  as  population  increases.  Mr.  J.  B.  Martin, 
writing  of  the  circulation  of  the  Bank  of  England 
notes  between  1844  and  1878,  remarks:  "There  is 
no  material  alteration  in  the  demand  for  bank 
notes  of  intermediate  values,  but  in  the  case  of 
those  of  the  highest  and  lowest  denominations  the 
change  is  very  remarkable.  The  circulation  of 
five-pound  notes  here  is  seen  to  have  doubled  it- 
self in  actual  volume  and  to  have  risen  12  per  cent, 
in  its  ratio  to  the  total  circulation,  while  the  circula- 
tion of  one-thousand-pound  notes  has  diminished 
by  more  than  one-half  in  actual  volume,  and  12 
per  cent,  in  its  ratio  to  the  total  circulation.  .  .  . 
There  can  be  but  little  doubt  that  the  increase  of 
banking  facilities  has  tended  to  the  settlement  of 
all  but  very  small  accounts  by  cheque ;  but  the 
increase  of  population,  the  greater  amount  of  busi- 
ness done,  and,  I  hope  we  may  add,  the  greater 
prosperity  of  the  masses,  have  caused  a  still  more 
rapidly  increasing  number  of  these  small  accounts 
to  demand  their  settlement  by  bank  notes."  l 
The  increase  in  the  proportion  of  small  change 

1  Journal  of  the  Institute  of  Bankers,  Vol.  I.,  p.  288. 
I  113 


MONEY 

has  occurred  in  our  own  currency  also.  Some 
evidence  of  this  is  found  in  the  fact  that  while  be- 
tween July,  1896,  and  March,  1903,  the  total  out- 
standing paper  currency  of  the  country  increased 
about  33  per  cent.,  the  one-dollar  notes  increased  in 
number  71  per  cent. ;  the  twos,  61  per  cent.  ;  the 
fives,  30  per  cent. ;  the  tens,  48  per  cent. ;  and  the 
twenties,  64  per  cent.1 

Another  bit  of  evidence  of  the  increase  in  the 
proportion  of  money  used  under  the  conditions 
discussed  is  found,  possibly,  in  the  fluctuation  of 
the  percentage  of  credit  paper  in  bank  deposits 
for  the  United  States  since  1881.  The  writer  has 
criticised2  the  opinion  that  this  falling  off  means  a 
diminution  in  the  use  of  credit  mechanism.  (We 
probably  find  the  true  explanation  in  the  thesis  we 
are  now  discussing.  We  may  have  been  passing 
through  a  period  of  relatively  increasing  use  of 
money. 

8.  Periodic  Character  of  the  Growth  of  Money  and 
Credit  Payments.  —  Since,  under  certain  conditions, 
the  proportion  of  payments  made  by  means  of 
credit  increases,  while  under  others  that  made  by 
ready  money  becomes  larger,  there  is  a  periodicity 
or,  at  least,  an  alternation 3  in  the  use  of  credit 
machinery  and  ready  money  to  make  the  payments 

1  Computed  from  data  in  the  United  States  J^reasuty  Monthly 
Summary  of  Commerce  and  Finance. 

-  ^(IQ  Journal  of  Political  Economy,  March,  1897,  P-  J73- 
3  If  the   credit  mechanism    is    at    its    limit    of   application,   the 
amount  of  money  may  not  increase  at  once,  even  though  business 
is  expanding.     It  may  be  less  costly  to  let  prices  fall. 

114 


AMOUNT  OF  METALLIC  MONEY  NEEDED 

called  for  by  new  business.  To  bring  out  this  fact 
more  clearly,  let  us  suppose  the  case  of  a  com- 
munity of  given  size  and  volume  of  business.  It 
uses  a  certain  amount  of  ready  money  for  direct 
payments,  a  certain  amount  as  a  basis  for  the 
emission  of  credit  paper,  and  it  effects  a  certain 
amount  of  its  payments  by  cancellation  through 
credit  paper.  Population  and  business  may  in- 
crease for  a  time  without  making  necessary  an 
increase  in  the  amount  of  money  used  directly,  or 
to  support  the  credit  system.  The  existing  money 
basis  may  be  made  to  serve  as  basis  for  an  ex- 
tended credit  by  using  a  more  refined  credit 
system,  a  more  complex  and  delicate  credit 
machinery.  But  there  comes  a  time  when  the 
expense  of  making  payments  with  credit  paper 
between  the  centre  and  the  outskirts  of  the  com- 
munity is  as  great  as  it  was  between  the  two 
separate  neighborhoods  before  the  population  be- 
came large  and  dense  enough  to  admit  of  a  highly 
developed  credit  system ;  and  the  expense  of  such 
a  credit  system  in  the  thinly  settled  portions  of  the 
community  is  too  great  to  justify  its  maintenance. 
It  is  cheaper  to  use  more  ready  money.  There 
comes  a  time,  too,  as  we  have  seen,  when  a  rise 
occurs  in  the  minimum  amount  for  which  it  pays 
to  use  the  existing  credit  machinery.  This  mini- 
mum can  be  reduced  again  only  by  an  extension 
of  the  credit  machinery  in  a  simpler  form  through 
the  investment  of  new  capital ;  that  is,  by  lowering 
the  marginal  unit  of  operation  of  the  credit  system. 


MONEY 

But  before  this  is  done,  a  period  elapses  during 
which  it  is  cheaper  to  use  more  ready  money. 
The  money  can  be  obtained  in  just  the  amount 
needed,  while  the  minimum  amount  of  capital  that 
it  would  pay  to  invest  in  credit  machinery  would 
produce  a  larger  extension  of  the  system  than  the 
situation  demanded.  When  the  amount  of  a  cer- 
tain kind  of  work  is  small,  we  do  it  by  hand  labor ; 
when  it  is  large,  we  use  machinery.  When  our 
need  for  goods  is  small,  we  buy  at  retail ;  when  it 
is  large,  we  buy  at  wholesale.  So  when  our  need 
for  more  paying  medium  is  small,  we  buy  it  as  we 
need  it  —  in  the  shape  of  ready  money  ;  v/hen 
our  need  is  large,  we  supply  it,  and  anticipate 
further  needs  by  new  investment  of  capital  in 
extending  the  credit  system. 

The  process  of  development,  when  demand  for 
medium  of  payment  presses  on  supply,  is,  then  : 
first,  the  refinement  of  the  existing  credit  machin- 
ery to  its  maximum  efficiency  ;  then  a  period  during 
which  it  is  less  costly  to  supply  the  new  demand 
by  means  of  ready  money  ;  and,  third,  the  expansion 
of  the  credit  machinery  by  the  investment  of  new 
capital.  Of  course  these  stages  of  growth  are  not 
in  fact  distinct.  Doubtless  the  money  supply  may 
increase,  and  the  credit  machinery  be  both  refined 
and  enlarged  simultaneously. 

There  must,  then,  be  a  fluctuation,  an  alternate 
expansion  of  the  circulating  money  part,  and  the 
credit  part,  of  the  medium  of  exchange.  And  this 
alternation  is  not  simple.  It  is  a  complex  move- 

116 


AMOUNT  OF  METALLIC  MONEY  NEEDED 

ment  of  several  series  of  fluctuations,  of  different 
sweep  or  amplitude.  Each  community  which  uses 
credit  is,  in  a  measure,  independent  of  others  in 
supplying  itself  with  a  medium  of  payment.  As 
its  need  increases,  it  refines  its  credit  system. 
When  the  point  is  reached  where  no  further  ex- 
pansion is  feasible  on  the  basis  of  its  internal 
means,  it  draws  on  the  neighboring  communities 
with  which  it  forms  an  intermediate  group,  so  to 
say,  in  the  interdependent  national  trade  organiza- 
tion. The  undulatory  movement  is  felt  in  time  by 
this  whole  group.  It,  in  turn,  relies  at  first  on  it- 
self to  supply  new  needs,  but  in  time  must  press 
on  similar  groups  in  the  world's  exchange  area. 
Thus  we  should  expect  a  series  of  undulations,  one 
included  within  another.  The  period  between  the 
points  when  it  will  be  necessary  either  to  get  more 
money  or  to  make  a  new  investment  in  credit 
machinery  will,  therefore,  be  longer  where  the 
credit  machinery  is  extensive  and  complex. 

What  has  been  said  thus  far  about  the  method  of 
adjustment  of  the  medium  of  exchange  to  demand 
has  had  reference  to  the  conditions  of  an  increasing 
demand.  When  business  is  decreasing  and  the  de- 
mand for  means  of  exchange  is  falling  off,  the  same 
general  principle  controls  the  situation.  A  com- 
munity will  use  the  least  expensive  mode  of  pay- 
ment. It  will,  therefore,  discard  first  its  most 
expensive  mode  of  payment,  or  it  will  discard  por- 
tions of  one  or  more  modes  of  payment  until  the 
expensiveness  of  the  marginal  unit  of  each  kind  of 

117 


MONEY 

payment  is  just  met  by  the  new  demand.  In  other 
words,  if  a  community  finds  that  it  can  contract  its 
credit  machinery  as  business  falls  off,  with  less  loss 
than  it  can  dimmish  its  holdings  of  metallic  money, 
it  will  do  so.  If,  on  the  contrary,  it  is  less  expen- 
sive to  devote  some  of  the  metal  now  in  the  form 
of  money  to  use  in  the  arts,  that  may  be  done. 
Still  again,  if  the  situation  does  not  justify  either  of 
these  proceedings,  the  efficiency  of  money  will  fall 
off,  and  the  money  will  pass  more  slowly  in  circu- 
lation. All  this,  however,  will  occur,  provided  it  is 
to  the  interest  of  a  community  to  maintain  the 
prevailing  price  level.  If  business  will  suffer  less 
from  a  falling  level  of  prices,  even  from  a  contrac- 
tion of  the  medium  of  exchange  in  any  of  the  ways 
mentioned,  then  prices  will  be  allowed  to  fall. 

The  method  of  adjustment  of  the  supply  of 
medium  of  exchange  to  changed  demand  is  not  af- 
fected, if  there  is  a  sudden  and  unexpected  increase 
in  the  supply  of  money.  The  process  of  adjust- 
ment, as  it  has  been  described,  is  for  the  moment 
arrested,  but  at  once  begins  again  on  the  basis  of 
the  new  conditions  caused  by  the  increased  supply. 
That  is,  if  the  increase  in  the  supply  is  not  con- 
tinuous, the  price  level,  or  the  credit  machinery, 
or  the  rapidity  of  circulation  will,  one  or  all, 
change,  in  order  to  accommodate  the  new  supply  of 
money.  Business  will  be  stimulated,  the  demand 
for  medium  of  exchange  increased,  and  a  new 
equilibrium  will  be  established  among  the  factors 
mentioned. 

118 


AMOUNT  OF  METALLIC  MONEY  NEEDED 

It  may  serve  to  bring  out  more  clearly  the  theory 
which  this  chapter  is  endeavoring  to  establish  if 
we  recapitulate  the  points  in  the  argument.  As 
population  and  business  grow,  creating  a  demand 
for  an  increased  quantity  of  medium  of  exchange, 
a  community  will  endeavor  to  retain  the  prevailing 
level  of  prices  by  extending  the  credit  system  to 
meet  the  new  demand.  This  process  of  extension 
will  go  on  until  it  is  no  longer  profitable.  The 
community  will  then  seek  to  add  to  its  holdings 
of  metallic  money,  provided  the  expensiveness  of 
securing  the  necessary  additions  will  not  entail  a 
greater  loss  than  would  be  suffered  by  permitting 
the  price  level  to  fall.  Thus  there  will  be  an  alter- 
nate extension  of  the  proportion  of  payments  made 
by  the  credit  mechanism  and  by  money,  respec- 
tively. There  will  also  be  a  slow  increase,  through 
long  periods,  of  the  proportion  of  payments  made 
by  money. 

9.  Relation  of  the  Theory  of  this  Chapter  to  the 
Amount  of  Money  needed  by  a  Country.  —  But  of 
what  practical  value  is  all  this  ?  Does  it  throw 
any  new  light  on  the  money  question  ?  It  cer- 
tainly does  not  tell  us  anything  about  the  absolute 
amount  of  money  that  a  community  uses  or  needs. 
But  it  does  throw  some  light  upon  the  relative 
amounts  used  by  communities  of  different  size. 
To  bring  out  its  practical  bearings,  let  us  imagine 
a  community  with  a  fixed  amount  of  money,  a 
credit  system  well  established,  and  a  growing  popu- 
lation and  business.  We  neglect,  as  before,  the 

119 


MONEY 

demand  for  currency  for  wholesale  trade.  We 
may  call  the  money  needed  for  actual  circulation, 
A  ;  that  used  as  a  reserve  for  bank  credits,  B, 
which  furnishes  the  amount  of  credit-paying  me- 
dium that  we  will  call  C.  Then  A  +  C  will  repre- 
sent the  total  volume  of  payments.  In  other  words, 
C  represents  the  bank  deposits  ;  or,  more  properly, 
that  portion  of  the  deposits  which  at  the  time  in 
question  is  in  active  use.  As  business  grows,  a 
larger  amount  of  payments  medium  is,  of  course, 
needed.  In  a  modern  community  the  demand  falls 
first  on  the  credit  machinery.  We  go  to  the  banks 
when  we  need  money.  The  result  will  be  a  stretch- 
ing, or  refinement,  of  the  credit  system,  on  the 
basis  of  the  same  reserve.  In  other  words,  the 
amount  of  money  used  for  a  reserve  will  be  made 
to  do  the  largest  possible  service.  But  by  and  by 
it  will  not  suffice.  Then,  perhaps,  the  community 
takes  some  money  hitherto  used  in  making  actual 
payments.  B  becomes  larger  at  the  expense  of  A, 
and  the  new  volume  of  payments,  which  we  will 
call  A '  +  C',  will  be  greater  than  A  +  C.  But  there 
is  a  limit  to  this  process.  Money  cannot  be  taken 
indefinitely  from  the  amount  which  is  ordinarily 
used  in  making  direct  payments.  Soon  the  com- 
munity must  face  a  condition  of  stationary  business 
and  falling  prices,  with  all  the  evils  and  loss  inci- 
dental thereto.  It  is  possible  that  a  supply  of  new 
money  is  available  at  a  price  ;  but  this  price  may  be 
so  high  that  there  is  less  social  loss  in  permitting 
the  price  level  to  fall  for  a  time  than  in  paying  the 

I2O 


AMOUNT  OF  METALLIC  MONEY  NEEDED 

price  for  a  new  supply  of  money.  There  comes  a 
turning-point,  however,  when  the  reverse  will  be 
true.  Then  the  community  will  purchase  more 
money ;  there  will  be  a  comparatively  sudden  rise 
in  the  relative  proportion  of  money  payments  as 
compared  with  credit  payments. 

The  supply  of  money  would  not,  therefore,  be 
steady,  even  apart  from  the  vicissitudes  of  mining. 
If  gold  and  silver  mining  were  of  a  character  such 
that  a  steady  supply  could  be  relied  upon  to  meet 
the  varying  demands,  we  still  would  find  periods  of 
relatively  sudden  increase  and  sudden  decrease  of 
the  volume  of  metallic  money,  as  against  the  vol- 
ume of  credit  payments.  We  appear  at  present 
to  be  passing  through  a  period  of  relative  increase 
of  metallic  money.  The  past  twenty-five  or  thirty 
years  has  been  a  period  of  relative  increase  of  the 
use  of  credit  payment.  But  the  credit  machinery 
has  apparently  been  strained  beyond  the  point 
where  the  existing  amount  of  metallic  money  con- 
stitutes an  adequate  reserve.  The  world,  therefore, 
was  confronted  with  a  regime  of  falling  prices. 
That  this  fallen  price  level  has  been  a  great 
hardship  to  many,  there  can,  of  course,  be  no 
denying.  But  if  our  reasoning  is  correct,  it  must 
be  true  that  the  world  has  suffered  less  from  the 
fallen  price  level  than  it  would  have  suffered  by 
changing  its  policy  and  increasing  the  volume  of 
metallic  money.  Otherwise  it  would  have  done  so. 

10.  Artificial  Increase  of  the  Money  Supply  In- 
expedient. —  If  these  conclusions  are  correct,  they 

121 


MONEY 

suggest  certain  matters  of  importance.  It  would 
appear  (i)  that  the  world  will  get  a  new  money 
supply  when  it  really  needs  it.  It  would  seem  (2) 
that  an  artificial  increase  of  the  supply  of  money  by 
such  devices  as  bimetallism  would  only  be  a  tem- 
porary expedient.  It  would  not  change  the  law  of 
the  growth  of  the  relative  volumes  of  credit  pay- 
ments and  specie  payments.  It  would  simply  sub- 
stitute a  higher  price  level  for  the  existing  price 
level  for  a  time.  It  would  seem  (3)  that  an 
artificial  stimulus  of  the  credit  machinery  is  also 
undesirable,  because  it  hastens  the  time  when  the 
community  will  need  a  larger  amount  of  metallic 
money  in  order  to  avoid  the  evils  of  falling  prices. 
It  is  clear  from  what  has  been  said,  that  the  ratio 
of  the  increase  of  money  is  by  no  means  one  of 
simple  proportion.  Indeed,  the  amount  of  money 
on  hand  may  relatively  decrease,  for  a  time,  with 
population  and  business  growing.  This,  of  course, 
is  a  well-known  fact.  But  in  no  case  does  it  ap- 
pear that  expanding  business  calls  for  a  steady  and 
proportionate  increase  in  metallic  money.  The 
amount  may  be  less  or  more  than  proportionate, 
and  is  never  steady  in  its  growth. 


122 


CHAPTER  VIII 

THE  VALUE  OF  MONEY 

REFERENCES  :  Del  Mar,  A.,  Science  of  Money,  Ch.  15  ;  Farrer, 
Lord,  The  Quantitative  Theory  of  Money  and  Prices,  Gold  Standard 
Defence  Association,  No.  29 ;  Hardy,  S.  M.,  The  Quantity  of 
Money  and  Prices,  1860-1891,  Journ.  Pol.  Econ.,  March,  1895; 
Laughlin,  J.  L.,  The  Principles  of  Money,  Ch.  8;  Mill,  J.  S., 
Political  Economy,  Bk.  III.,  Chs.  8-9  ;  Mitchell,  W.  C,  The  Quan- 
tity Theory  of  the  Value  of  Money,  Journ.  Pol.  Econ.,  March,  1896; 
Nicholson,  J.  S.,  Money  and  Monetary  Problems,  5th  ed.,  Pt.  I., 
Ch.  5,  Pt.  II.,  Ch.  5  ;  Pareto,  V.,  Cours  d'Economie  Politique, 
Vol.  I.,  §  290  ff.;  Ricardo,  D.,  Works  (McCulloch's  ed.),  Ch.  27; 
Scott,  W.  A.,  The  Quantity  Theory,  Annals  Amer.  Acad.,  March, 
1897;  Money  and  Banking,  Chs.  3-4;  Walras,  L.,  Theorie  de  la 
Monnaie,  Ch.  2 ;  Elements  d'Economie  Politique  Pure,  3d  ed., 
p.  383 ;  White,  H.,  Money  and  Banking,  1st  ed.,  pp.  419-426. 

1.  Difficulty  of  the  Subject.  —  The  most  com- 
plex and  difficult  subject  in  the  theory  of  money  is 
the  determination  of  its  value.  The  popular  treat- 
ment of  the  subject  is  simple  enough,  and  receives 
considerable  support  from  the  usual  scientific  expo- 
sition. Since  it  is  obvious  that  the  value  of  money 
must  have  some  relation  to  its  quantity,  it  is  usually 
said  that  the  value  of  money  varies  with  its  quan- 
tity ;  that  an  increase  in  the  amount  of  money  will 
cause  a  fall  in  its  value  and  a  rise  in  prices  ;  and 
that  conversely  a  decrease  in  the  quantity  of  money 

123 


MONEY 

will  cause  a  rise  in  its  value  or  a  fall  in  prices,  in 
each  case  in  proportion  to  the  change  in  quantity. 
This  view  of  the  matter  is  far  from  being  complete 
or  accurate,  and  the  subject  requires  careful  analy- 
sis if  we  are  to  arrive  at  a  conclusion  which  is  defi- 
nite, to  say  nothing  of  being  correct. 

2.  The  Price  Level  distinguished  from  Relative 
Prices.  —  The  value,  or  general  purchasing  power, 
of  money  is  indicated  by  the  amount  of  goods 
which  one  standard  unit  of  it  will  buy.  This 
amount  is  the  typical,  or  composite,  unit  of  com- 
modity, which  may  be  described  as  composed  of  a 
quantity  of  every  article  in  the  market,  the  value  of 
each  article  in  the  unit  being  the  same  proportion 
of  the  value  of  the  whole  unit  as  that  of  the  whole 
amount  of  the  article  is  to  the  total  value  of  all  the 
goods  on  sale.  The  value  of  money  is  a  question 
of  the  relation  between  goods  and  money,  and  not 
between  one  kind  of  goods  and  another.  In  ask- 
ing what  is  the  value  of  money,  we  ask  not  why 
one  article  costs  $i  and  another  $2  but  why  the 
articles  cost  $i  and  $2  respectively,  rather  than 
some  other  amounts,  as  $5  and  $10.  The  question 
why  one  article  costs  $i  and  another  $2  is  a  ques- 
tion of  relative  prices,  a  question  of  the  relation 
of  goods  to  one  another.  The  other  question  is  an 
inquiry  of  the  relation  of  goods  to  money.  What 
we  are  seeking  to  determine  is  the  value  which 
will  attach  to  the  money  article,  as  money,  in  con- 
sequence of  being  actually  exchanged  for  goods 
at  a  given  moment. 

124 


THE    VALUE    OF    MONEY 

3.  Conditions  assumed  to  simplify  the  Problem. 

• —  The  problem  is  one  of  considerable  complexity, 
because  there  are  so  many  factors  of  which  the  value 
of  money  is  a  resultant.  An  equilibrium  must  be  de- 
termined, in  the  first  place,  between  the  value  of  the 
money  article  for  monetary  purposes  and  its  value 
for  use  in  the  arts ;  then  between  this  value  and 
that  of  the  goods  for  which  it  exchanges.  Finally, 
when  these  equilibria  have  been  determined,  they 
are  modified  by  the  introduction  of  credit  and 
by  the  retention  of  exchange  by  barter.  For  the 
solution  of  a  problem  so  complex  it  is  necessary 
that  we  should  isolate  certain  of  the  factors,  as  well 
as  we  can,  and  seek  to  determine  their  action  when 
regarded  as  operating  by  themselves.  Accordingly 
we  assume,  first,  that  the  money  article  is  used  for 
no  purpose  but  to  effect  exchanges.  It  facilitates 
exchange  and  serves  as  a  measure  of  value,  but  it 
is  of  no  use  for  direct  consumption.  It  is  assumed, 
further,  that  there  is  on  hand,  and  actually  offered 
in  exchange,  a  given  quantity  of  such  money,  and 
a  definite  amount  of  goods  ;  and  that  money  passes 
at  each  sale,  no  commodity  being  exchanged  by  bar- 
ter or  sold  on  credit.  Under  these  conditions,  what 
determines  the  value  of  money  ? 

4.  The  Value   of   Money  a   Social   Fact.  —  The 
value  of  money  which  we  are  seeking  is,  we  must 
remember,  a    social   phenomenon.     It   is  not   the 
purchasing  power  set  upon  money  by  any  individ- 
ual.    It  may  be  that,  of  the  indefinite  number  of 
people  who    participate    in    its    determination,  no 

T25 


MONEY 

two  agree,  and  that  not  one  individual  valuation 
is  the  same  as  that  which  finally  emerges  from  the 
competitive  struggle.  The  value  in  question  de- 
pends primarily  upon  the  service  which  it  renders, 
as  a  medium  of  exchange,  to  society  as  a  whole. 
The  nature  and  amount  of  that  service  is  found  in 
the  addition  which  money  exchange  makes  to  the 
utilities  at  the  disposal  of  society,  and  this  addi- 
tion marks  the  upper  limit  of  the  value  of  the 
money  at  the  disposal  of  society. 

5.  Advantage  of  replacing  Barter  with  Money 
Exchange.  —  Let  us  assume  a  society  composed 
of  people  unacquainted  with  exchange,  who  by 
the  bounty  of  nature  possess  ten  thousand  million 
units  of  goods.  Each  member  of  the  community 
consumes  what  he  himself  produces  and  exchanges 
with  no  one  else.  All  the  people  together  con- 
sume directly  five  thousand  million  units  and  are 
entirely  contented  with  that  amount  of  consump- 
tion, so  that  no  further  satisfaction  can  be  obtained 
from  the  rest  of  the  goods.  The  remainder  of 
their  possessions,  therefore,  have  no  utility  and 
no  value  for  them.  Suppose,  now,  that  one  thou- 
sand million  units  of  goods  are  bartered,  and 
thereby  get  into  the  hands  of  people  who  want 
them.  The  result  will  be  an  increase  in  utilities 
to  the  community,  and  the  amount  of  increase 
in  utility  will  represent  the  advantage  of  simple 
barter,  or  direct  exchange.  If,  in  accomplishing 
this  amount  of  exchanges,  the  community  used 
any  quantity  of  goods  up  to  one  thousand  million 

126 


THE    VALUE    OF    MONEY 

units,  it  would  gain.  Hence  it  could  afford  to 
consume  any  quantity  up  to  that  amount,  in  per- 
forming the  exchanges  necessary  to  carry  off  the 
additional  one  thousand  million  units  of  goods. 
As  a  result  of  the  inability  of  the  members  of  the 
community  to  get  together  at  the  right  times  and 
places,  with  the  right  amounts  and  kinds  of  goods, 
the  other  four  thousand  million  units  of  goods  can- 
not be  exchanged,  and  their  value  would  therefore 
be  lost. 

Suppose  that  money  is  now  suddenly  introduced. 
The  community  all  at  once  finds  that  some  article 
possesses  the  quality  of  universal  marketability,  so 
that  each  individual  is  willing  to  give  it  for  goods 
he  wants  and  does  not  have,  or  take  it  for  goods 
he  has  and  does  not  want.  By  means  of  this 
money  the  people  are  enabled,  we  will  suppose, 
to  exchange  at  one  moment  all  the  remaining  four 
million  units  of  goods,  actually  paying  out  a  piece 
of  money  in  each  exchange  for  a  unit  of  goods. 
The  consequence  of  this  change  is  an  increase  of 
utilities  to  the  community,  and  the  amount  of  this 
increase  represents  the  advantages  of  a  complex 
barter,  or  money  exchange.  In  order  to  secure 
these  additional  utilities,  the  society  can  afford  to 
expend  any  amount  up  to  their  total  value. 

6.  The  Maximum  Value  of  the  Money  Supply 
which  a  Society  can  afford  to  Have.  —  If  the  means, 
the  machinery,  created  for  performing  the  ex- 
changes, lasted  through  more  than  one  period  of 
exchanges,  the  society  could  afford  to  provide  it, 

127 


MONEY 

if,  within  its  life,  it  returned  its  original  cost  at  the 
current  profitableness  of  production.  That  is,  the 
upper  value  of  the  means  of  exchange  to  society 
will  be  that  of  an  investment  of  capital,  whose 
product  is  equal  to  the  expense  of  barter  thus 
saved.  In  other  words,  let  us  suppose  that  the 
cost  of  exchanging  goods  by  barter  is  represented 
to  a  community  by  the  consumption  of  A  units  of 
utility,  in  one  set  of  exchanges,  or  in  one  period 
of  exchange.  Let  Y  represent  the  quantity  of 
money  introduced ;  and  B  its  cost,  in  units  of  util- 
ity consumed  in  its  production.  If  Y,  the  money, 
lasts  only  through  one  set  of  exchanges  and  then 
perishes,  society  will  save  in  performing  the  ex- 
changes A  units  of  utility  and  will  expend  B  units, 
thus  saving  by  the  exchange  A  —  B  units.  If  the 
money  lasts  through  two  exchanges,  the  saving  in 
each  is  A—B/2',  if  through  three  exchanges, 
A  —  B/$.  If  there  are  X  exchanges,  the  saving 
in  each  is  A  —  B/X.  If  X  is  indefinite,  that  is,  if 
the  money  lasts  through  an  indefinite  period,  as 
is  practically  the  case  with  gold,  then  the  fraction 
B I X  approaches  zero,  and,  to  use  a  mathematical 
phrase,  the  saving  would  approach  A.  At  this 
point,  society  can  afford  to  invest  a  value  which, 
at  the  current  profitableness  of  production,  will 
yield  A  units  of  utility  within  the  period  of  dura- 
tion of  one  complete  set  of  exchanges.  This  is 
true  whatever  the  physical  character  of  money.  If 
the  money  is  paper  and  lasts  only  for  one  or  two 
exchanges,  the  cost  of  production,  B,  grows  smaller, 

128 


THE    VALUE    OF    MONEY 

and  the  number  of  exchanges  through  which  it 
lasts  grows  smaller  too.  In  other  words,  the  frac- 
tion B /X  approaches  zero,  as  in  the  case  of  com- 
modity money.  However,  B/X  will  always  be 
larger  for  paper  money  than  for  gold  money.  At 
the  limit  of  profitableness  of  its  use,  therefore,  the 
cost  of  production  has  no  effect  on  the  value  of 
money.  The  maximum  amount  of  money  which  a 
community  can  afford  to  acquire  will  depend,  there- 
fore, upon  the  current  profitableness  of  its  industry, 
and  will  have  a  value  such  as,  at  that  rate,  will  yield, 
within  the  period  necessary  to  complete  one  set  of 
exchanges,  a  return  equal,  at  the  maximum,  to  the 
expense  of  making  the  exchange  by  barter.  In 
other  words,  if  it  be  assumed  that  the  amount 
and  nature  of  money  as  an  instrument  is  such  as 
will  enable  exchanges  with  it  to  be  so  extended 
that  the  greatest  possible  amount  of  utilities  deriv- 
able from  exchange  will  be  secured,  then  this 
greatest  possible  amount  of  utilities  derivable 
from  exchange  will  set  the  upper  limit  to  the 
total  value  of  money. 

7.  The  Minimum  Value  of  the  Money  Supply  to 
a  Society.  —  The  total  value  of  money  to  society 
also  has  a  lower  limit.  It  is  often  said  that  any 
sum  of  money,  however  small,  would  suffice  to  per- 
form the  exchanges  ;  that  the  only  difference  that 
would  be  caused  by  using  a  larger  or  a  smaller 
quantity  would  be  in  the  terms  in  which  prices 
were  expressed.  In  other  words,  it  is  said  that 
to  reduce,  or  to  multiply,  the  amount  of  money  in 

K  129 


MONEY 

use  ten  times,  would  simply  change  the  money  valua- 
tion of  all  articles  and  scale  prices  according  to  the 
change  in  the  quantity  of  money.  This  statement 
has  an  element  of  truth,  but  needs  to  be  carefully 
made  in  order  not  to  mislead.  If  the  money  in  use 
were  non-material,  the  statement  would  be  true ; 
but  the  money  article  is  material.  In  order  to 
serve  its  purpose  it  must  be  divided  and  distrib- 
uted among  many  people,  over  large  areas.  This 
physical  division  and  distribution  cannot  take  place 
unless  there  is  a  certain  quantity.  There  must  be 
enough  to  work  with,  else  the  physical  difficulties 
of  barter  would  simply  be  replaced  with  the  phys- 
ical difficulties  of  money  exchange.  When  this 
working  minimum  of  money,  whatever  it  is,  is  ob- 
tained, an  actual  ratio  of  exchange  between  money 
and  goods  emerges.  This  minimum  just  removes 
the  expense  of  the  most  expensive  portion  of  barter 
exchange.  The  total  value  of  money  may,  there- 
fore, fluctuate  between  this  minimum  and  the 
greatest  possible  amount  of  utilities  derivable  from 
exchange,  but  will  always  be  determined  by  the 
utilities  which  it  creates  or  saves.  The  total  value 
of  money  being  determined,  the  value  of  the  unit 
of  money  will  be  proportionate  to  the  number  of 
units. 

8.  The  Unreality  of  the  Above  Conditions  and 
the  Actual  Limits  of  the  Money  Supply.  —  But  no 
society,  no  community,  no  country,  ever  acquires 
this  maximum  ;  for  in  none  does  that  state  of 
affairs  ever  obtain  wherein  a  piece  of  money  actu- 

130 


THE    VALUE    OF    MONEY 

ally  changes  hands  for  one,  and  only  one,  unit  of 
goods  within  the  period  of  a  single  set  of  exchanges. 
Each  piece  performs  its  service  many  times  within 
each  period.  Moreover,  in  a  society  which  makes 
its  exchanges  entirely  without  the  use  of  credit, 
the  money  exchange  would  never  wholly  supplant 
the  barter  exchange.  Nor  would  any  society  re- 
main content  with  the  minimum  supply.  In  the 
absence  of  credit,  and  under  the  conditions  which 
were  assumed  as  to  the  character  and  services  of 
the  money  article,  each  society  will  push  its  acqui- 
sition of  money  to  the  point  where  the  investment 
of  further  labor  and  capital  for  the  exchange  of  an 
additional  unit  of  goods  would  yield  no  utility  over 
exchanging  the  goods  by  barter. 

The  application  of  successive  units  of  money  to 
effect  exchanges  is  attended  by  results  of  varying 
importance.  Each  unit  applied  adds  a  less  pro- 
portionate value  than  the  last  preceding  one,  up  to 
the  point  where  the  social  cost  of  making  another 
exchange  will  be  the  same  whether  made  by  barter 
or  by  money  exchange.  Any  addition  of  money 
beyond  the  quantity  necessary  to  bring  this  about 
will  lower  its  marginal  utility  below  the  point  of 
profitableness.  The  value  of  the  unit  of  money 
would  under  these  conditions  be  lessened.  The 
total  value  of  the  money  would  not  change,  how- 
ever, because  nothing  has  been  added  to  the  utili- 
ties afforded  by  money  exchange.  Hence  the 
decrease  in  marginal  utility,  or  the  value  of  the 
monetary  unit,  must  be,  beyond  this  point,  inversely 

13 ' 


MONEY 

proportional  to  its  quantity.  The  use  of  money 
beyond  this  point  would  involve  a  social  loss.1 
Subtractions  from  the  amount  of  money,  when  it 
is  in  excess,  take  nothing  from  the  total  utilities  its 
use  confers  on  society  and  will  not  affect  its  total 
value  while  the  excess  remains  ;  but  the  value  of 
the  unit  will  increase  in  proportion  to  the  change 
in  quantity. 

If  the  amount  of  money  available  is  less  than 
sufficient  to  substitute  money  exchange  for  barter, 
down  to  the  point  of  equilibrium  of  advantage  from 
the  two  methods  of  exchange,  additions  to  its 
amount  will  add  something  to  the  utilities  deriv- 
able from  exchange  by  means  of  money,  and  will  in- 
crease its  total  value.  For,  although  the  value  of 
the  unit  will  decrease,  since  each  succeeding  unit 
applied  in  effecting  exchanges  adds  a  less  propor- 
tionate value  than  the  preceding  one,  the  decrease 
will  not  be  in  proportion  to  the  increase  in  the 
number  of  units.  Subtractions  from  its  amount 
will  take  something  from  the  utilities  derivable 
from  money  exchange,  and  will  therefore  reduce  its 
total  value,  but  not  in  proportion  to  the  decrease  in 
the  amount,  because  the  value  of  the  unit  will  in- 
crease, since  the  last  unit  now  used  in  effecting 
exchanges  has  a  greater  value  than  any  of  the 
units  dropped  from  use. 

1  Under  certain  conditions  an  addition  to  the  quantity  would  add 
less  than  nothing  to  the  utilities  derivable  from  exchange,  and  would 
lower  the  value  of  the  unit  in  greater  rate  than  the  increase  in  the 
number  of  units.  This  would  occur,  for  example,  if  confidence  in 
government  paper  were  shaken  when  it  was  the  only  money  in  use. 
132 


THE    VALUE    OF    MONEY 

9.  Limitation  upon  the  Freedom  of  Choice  be- 
tween Barter  and  Money  Exchange.  —  Two  hy- 
potheses underlying  this  discussion  are  so  vital  to 
its  logical  consistency,  and  to  the  conformity  of 
the  theory  with  actual  conditions,  that  it  is  impor- 
tant to  consider  how  far  they  are  realized.  One 
of  these  hypotheses  is  that  in  the  effort  to  secure 
the  cheapest  means  of  exchange  at  any  time,  so- 
ciety is  able  to  resort,  without  loss,  to  barter  or  to 
money  exchange,  indifferently.  This  is,  however, 
far  from  being  possible.  The  use  of  money  devel- 
ops an  amount  of  business  to  which  barter  could 
not  possibly  be  applied ;  and,  moreover,  even  in 
the  cases  in  which  it  was  formerly  used,  when  it 
has  once  been  abandoned,  it  cannot  be  again  re- 
sorted to  to  any  large  extent.  For  not  only  will  the 
money-using  habit  have  been  established,  but  the 
money  is  a  tool  which,  once  produced,  must  be 
used.  It  cannot  be  put  aside  without  loss.  It 
represents  to  society  a  fixed  investment  which  will 
prove  a  loss  if  its  use  is  abandoned.  It  would  seem, 
therefore,  that  a  quantity  of  money  once  produced 
in  excess  of  the  amount  which  will  make  the  mar- 
ginal exchange  profitable,  may  be  used  with  less 
social  loss  than  its  abandonment  would  occasion. 
It  would  seem,  therefore,  that  the  effect  of  a  change 
in  the  quantity  of  money  on  its  value  could  not  be 
readily  and  effectually  checked  through  resort  to 
a  larger  or  smaller  use  of  barter,  and  would  there- 
fore be  more  violent  than  the  discussion  above 
would  indicate. 

133 


MONEY 

The  restriction  on  the  resort  to  barter  after  the 
money  exchange  has  become  established  is  of  less 
importance,  however,  than  the  above  remarks  of 
themselves  would  justify  us  in  believing.  For,  in 
the  first  place,  although  resort  to  direct  barter  is 
not  available,  society  can  vary  its  exchanges  through 
credit,  and  will  do  so  until  the  marginal  utility  of 
money  for  effecting  exchanges  directly  is  equal  to 
its  marginal  utility  for  effecting  them  through  the 
credit  machinery. 

Again,  the  unavailability  of  a  resort  to  barter  to 
check  the  effect  of  changes  in  the  quantity  of  money 
is  offset  in  a  measure  by  the  fact  that  a  change 
in  the  quantity  of  money  induces,  immediately  or 
soon,  a  change  in  the  amount  of  goods  to  be  ex- 
changed. Society  has,  therefore,  an  economic  es- 
cape in  at  least  two  ways  from  changes  in  the  value 
of  money  due  to  sudden  changes  in  its  amount. 

10.  The  Relation  of  the  Quantity  of  Goods  to 
their  Marginal  Utilities.  —  The  second  important 
hypothesis  which  underlies  our  theory  of  the  value 
of  money  is  that  the  marginal  utilities  of  goods  are 
not  proportional  to  their  quantities.  This  seems  so 
obvious  as  scarcely  to  need  mention,  yet  it  seems 
not  infrequently  to  be  ignored  in  discussions  of  the 
value  of  money.  We  have  seen  that  under  certain 
conditions  the  value  of  money  is  proportional  to  its 
quantity  —  a  point  which  we  shall  soon  establish 
in  another  way.  Too  often,  however,  the  modify- 
ing conditions  are  omitted  from  the  statement.  It 
holds  true,  as  we  shall  see  later,  only  when  the 


THE    VALUE    OF    MONEY 

quantity  of  goods  for  which  this  money  is  ex- 
changed is  assumed  to  remain  constant,  so  that 
their  marginal  utility  does  not  change,  although  the 
quantity  of  money  does  change.  Under  these  cir- 
cumstances the  marginal  utility  of  the  money  article, 
if  it  has  no  other  use,  must  be  constant,  and  the 
size  of  the  marginal  unit  will  depend  entirely  on  the 
total  quantity.  That  is,  as  the  mathematicians  say, 
the  marginal  unit  whose  utility  remains  unchanged 
is  a  magnitude  of  a  different  order  from  the  mar- 
ginal unit  before  the  change. 

11.  The  Value  of  Money  at  any  Moment  deter- 
mined by  Demand  and  Supply.  —  If,  then,  money 
is  available  at  a  cost,  society  will  gradually  extend 
its  use  down  to  the  point  where  its  marginal  service 
equals  in  value  that  of  other  means  of  exchange. 
It  will  do  so  through  the  competition  of  individuals 
who  are  seeking  to  exchange  their  products.  That 
is,  the  value  of  the  money  in  use  at  any  time  will 
be  fixed  by  competition  for  it ;  and,  socially  speak- 
ing, it  will  be  the  capitalized  value  of  the  service 
rendered  in  the  marginal  exchange.  Each  ex- 
changer of  goods  will  be  willing  to  give  for  it  the 
capitalized  value  of  an  amount  that  equals  the 
utility  of  money  exchange  over  barter,  as  applied 
in  the  exchange  of  the  last  unit  of  goods  he  sells. 
For  this,  to  him,  is  the  marginal  cost  of  exchange. 
These  costs,  and  the  utilities  equivalent  to  them, 
which  are  created  by  the  use  of  money,  differ  for 
different  producers.  Hence  they  compete  for  the 
money,  offering  amounts  which  represent  the  capi- 


MONEY 

talized  value  of  its  service  to  them.  As  a  result  of 
this  competition,  the  value  of  the  money  unit  at 
any  moment  will  be  that  imputed  to  the  last  unit 
of  money  demanded,  as  measured  by  the  utility  of 
the  last  unit  of  goods  offered  in  exchange  for  the 
money.  In  other  words,  the  value  of  the  money 
will  be  the  value  of  its  marginal  unit  offered  and 
accepted  in  exchange,  and  will  be  equal  to  the 
utility  of  the  last  unit  of  goods  necessary  to  bring 
into  use  the  whole  amount  of  money  demanded. 

In  order  to  make  this  clear,  let  us  illustrate  the 
method  of  procedure  by  which  the  ratio  of  ex- 
change between  two  articles  is  fixed.  Suppose 
there  are  five  men  who  wish  to  sell  wheat  and  five 
who  have  money  to  offer  for  it.  Let  us  suppose 
that  — 

A  offers  one  bushel  of  wheat  for  $0.97. 
B  offers  one  bushel  of  wheat  for  $0.98. 
C  offers  one  bushel  of  wheat  for  $1.02. 
D  offers  one  bushel  of  wheat  for  $1.03. 
E  offers  one  bushel  of  wheat  for  $1.00. 

That  is  to  say,  each  one  of  these  men  estimates 
the  value  of  a  bushel  of  wheat  to  himself  as  equiva- 
lent to  that  of  the  amount  of  money  represented 
by  97  cents,  98  cents,  etc.,  respectively. 

Now,  the  owners  of  money  who  want  to  buy 
wheat  do  not  know,  any  more  than  do  the  holders 
of  wheat,  what  is  the  price  that  must  obtain  in 
order  to  carry  off  the  entire  product  in  exchange 
for  all  the  money  which  they  offer.  Therefore 


THE    VALUE    OF    MONEY 

they  will  offer  different  amounts  of  money  per 
bushel.  To  continue  our  illustration,  let  us  sup- 
pose that  — 

A'  is  willing  to  give  for  a  bushel  of  wheat  $1.00. 
B'  is  willing  to  give  for  a  bushel  of  wheat  $1.05. 
C'  is  willing  to  give  for  a  bushel  of  wheat  $0.95. 
D'  is  willing  to  give  for  a  bushel  of  wheat  $0.98. 
E'  is  willing  to  give  for  a  bushel  of  wheat  $0.99. 

Each  would-be  buyer  wishes,  of  course,  to  get 
his  wheat  as  cheaply  as  possible,  and  is  not  likely 
to  offer  his  maximum  price.  The  man  who  is  will- 
ing to  give  $1.00  rather  than  go  without,  will  wait 
to  see  whether  somebody  else  does  not  get  wheat 
at  a  lower  price.  If  so,  he  will  not  give  $1.00. 
Let  us  suppose  that  the  offers  begin  at  90  cents 
and  rise  gradually.  At  90  cents  per  bushel  any 
one  of  the  holders  of  money  would  buy,  but  no 
one  of  the  owners  of  wheat  would  sell.  This  state 
of  affairs  would  continue  until  the  price  offered 
reached  97  cents,  the  lowest  figure  which  any 
seller  is  willing  to  take. 

When  the   price  was  at  97  cents    four  would   be 

willing  to  buy  and  one  to  sell. 
At  98  cents  four  would  be  willing  to  buy  and  two 

to  sell. 
At  98^  cents  three  would  be  willing  to  buy  and 

two  to  sell. 
At  99  cents  three  would  be  willing  to  buy  and  two 

to  sell. 


MONEY 

At  99|-  cents  two  would  be  willing  to  buy  and  two 

to  sell. 
At  99|  cents  two  would  be  willing  to  buy  and  two 

to  sell. 
At  $1.00  two  would  be  willing  to  buy  and  three  to 

sell. 
At  $1.05  one  would  be  willing  to  buy  and  five  to 

sell. 

It  is  obvious  that  the  sales  would  take  place  at  a 
point  between  a  little  over  99  cents  and  a  little 
less  than  J^i.oo.1 

If  there  is  an  increase  in  the  supply  of  wheat, 
its  marginal  utility  will  fall  and  more  of  it  will  be 
offered  for  the  same  amount  of  money.  If  there 
is  a  decrease  in  the  supply  of  wheat  offered,  the 
opposite  state  of  affairs  will  be  true.  As  a  result 
of  the  competitive  forces  in  the  case  under  con- 
sideration, we  find,  then,  that  the  value  of  money 
is  fixed  at  a  point  where  approximately  $i  will 
exchange  for  one  bushel  of  wheat.  If,  instead 
of  wheat,  we  use  our  composite  unit  of  commodity, 
there  will  be  no  difference  in  the  illustration.  The 
effect  of  offering  two  articles  instead  of  one  for 
money,  at  the  same  time,  is  simply  to  offer  a  com- 
posite commodity  unit  of  the  kind  we  have  de- 
scribed, composed  of  two  articles,  each  entering 
in  to  form  the  unit  in  the  ratio  determined  by  its 
relative  value.  If  we  add  three  or  more,  the  same 

1  Just  where  the  fluctuation  would  stop  and  the  exact  price 
emerge,  is  still  an  uncertain  question. 

138 


THE    VALUE    OF    MONEY 

thing  is  true.  Instead  of  one  bushel  of  wheat  we 
have  now  a  composite  unit  of  three  or  more  articles. 
If  the  amount  of  money  is  increased,  each  addi- 
tional increment  brings  out  for  exchange  an  ad- 
ditional quantity  of  goods,  which,  at  the  former 
price,  was  kept  out  of  the  market.  That  is,  as 
money  is  added  the  price  rises  to  the  value  which 
the  next  marginal  seller  must  get  for  each  unit  of 
goods  that  he  is  willing  to  sell. 

It  is  obvious,  therefore,  as  was  already  said,  that 
the  value  of  money  is  fixed  in  precisely  the  same 
way  as  the  value  of  other  articles.  It  is  equal  al- 
ways to  the  marginal  utility  of  the  last  unit  of 
goods  necessary  to  absorb,  or  put  into  use,  all 
the  units  of  money  wanted,  and  the  number  wanted 
will  be  fixed  by  society  at  the  point  where  the  ad- 
vantage of  money  exchange  will  be  in  equilibrium 
with  that  of  other  means  of  exchange.  It  may 
happen,  when  the  value  of  money  has  been  for  the 
moment  fixed,  that  there  are  owners  who  impute  a 
higher  value  to  their  goods  than  is  contained  in  the 
amount  of  money  which  they  could  get  for  them. 
In  that  case  they  will  either  consume  the  goods 
themselves,  or  exchange  them  by  barter,  or  suffer 
loss. 

12.  The  Quantity  of  Money  and  its  Value.  —  If 
the  amount  of  goods  remained  the  same  through 
several  sets  of  exchanges,  while  the  quantity  of 
money  changed,  the  marginal  utility  of  the  goods 
would  be  constant,  the  amount  of  money  which  the 
marginal  unit  would  command  would  change,  but 

139 


MONEY 

the  marginal  utility  of  this  changing  amount  would 
remain  the  same,  since  it  is  but  the  borrowed,  or 
reflected,  utility  of  the  marginal  unit  of  goods.  In 
this  case  the  value  of  the  money  would  vary  in- 
versely as  its  quantity.  This  is  the  same  conclu- 
sion at  which  we  arrived  when  considering  the 
value  of  money  from  the  point  of  view  of  a  social 
investment.  To  bring  this  point  out  clearly,  let  us 
suppose  that  there  are  one  thousand  units  of  goods, 
and  that  the  marginal  utility  of  the  goods  is  three 
units  of  utility.  Then  one  unit  of  goods  will  ex- 
change for  -i-gVo'  °f  the  money,  and  the  marginal 
utility  of  the  money  also  will  be  three.  In  other 
words,  the  whole  quantity  of  money  will  be  divided 
into  one  thousand  pieces,  each  piece  will  exchange 
for  one  unit  of  goods  and  the  marginal  utility  of 
each  piece  will  be  that  of  a  unit  of  goods.  Sup- 
posing now  the  quantity  of  money  is  arbitrarily 
doubled,  what  will  be  the  effect  on  its  value  ? 
Obviously,  under  our  assumption,  one  unit  of 
goods  will  exchange  still  for  -joVfr  °^  a^  the 
money.  The  new  unit  of  money  will  be  twice 
the  quantity  of  the  old  unit,  but  its  marginal  utility 
will  be  the  same,  for  its  marginal  utility  will  be  that 
of  the  goods  it  buys.  Obviously,  therefore,  the 
marginal  utility  of  money  has  sunk  one-half.  The 
value  of  the  present  quantity  of  money  which  is 
equal  to  that  in  the  former  marginal  unit  will  be  i\. 
In  other  words,  the  value  of  money  has  changed 
inversely  as  its  quantity.  The  same  conclusion 
holds  for  diminution  of  the  quantity  of  money. 

140 


THE    VALUE    OF    MONEY 

The  relation  between  the  quantity  of  money  and 
its  value,  under  tJie  conditions  we  have  assumed,  is, 
therefore,  purely  quantitative.  The  value  is  pro- 
portional to  the  quantity  in  an  inverse  ratio.  The 
reason  for  this  is,  as  has  been  pointed  out,  that  the 
money  has  no  marginal  utility  of  its  own.  It 
is  of  no  use,  under  our  hypothesis,  excepting  for 
exchange.  Once  on  hand,  it  must  be  used  in  ex- 
change unless,  indeed,  it  becomes  so  voluminous  as 
to  check  the  confidence  of  the  community  in  its 
stability  of  value,  and  so  to  cause  it  to  be  aban- 
doned. 

13.  The  Relation  of  Quantity  and  Value  in  the 
Case  of  Commodity  Money.  —  The  quantitative  re- 
lation just  described  can  exist,  however,  with  only 
one  kind  of  money,  —  inconvertible  paper.  The 
fact  is  that  the  money  article  has  always  had  direct 
utility,  a  marginal  utility  derived  from  the  fact  that 
it  was  in  demand  for  other  purposes  than  ex- 
change. The  effect  of  the  existence  of  a  margi- 
nal utility  due  to  other  uses  than  exchange  is  to 
render  ineffective  the  relation  between  the  quan- 
tity of  money  and  its  value.  To  prove  this,  let  us 
refer  to  our  former  illustration.  According  to 
that,  one  thousand  units  of  goods  with  a  marginal 
utility  of  three  were  exchanged  for  one  thousand 
units  of  money,  and  the  marginal  utility  of  the 
money  was  also  three.  When  we  doubled  the 
quantity  of  money,  we  found  that  each  unit  of 
goods  exchanged  for  just  double  the  former  quan- 
tity of  money,  and  that  the  value  of  the  money 

141 


MONEY 

was  halved.  But  according  to  our  present  suppo- 
sition, the  value  of  the  money  is  the  result  of  an 
independent  force.  The  demand  for  it  for  direct 
consumption  fixes  a  marginal  utility  upon  it  as  a 
commodity,  irrespective  of  its  use  as  money.  Now 
the  marginal  utility  of  a  commodity  does  not  vary 
inversely  as  its  quantity.  If  we  double  the  quan- 
tity of  wheat,  we  may  not  thereby  halve  its  value ; 
or,  on  the  other  hand,  we  may  reduce  it  by  more 
than  half.  Similarly,  doubling  the  quantity  of  a 
money  article  of  direct  utility  may  not  reduce  its 
value  one-half.  Suppose  the  increase  of  quantity 
reduces  the  value  one-third,  so  that  the  utility  of 
the  amount  of  money  in  the  old  marginal  unit  is  2. 
The  amount  of  money  which  has  this  marginal 
utility  is  one-half  that  of  the  new  marginal  unit, 
whose  utility  is,  therefore,  4.  The  marginal  utility 
of  the  goods  is  still  3.  Hence  we  will  give,  not 
2  units  of  the  old  size,  but  i|,  for  a  unit  of  goods. 
For  1 1  units,  with  a  marginal  utility  of  2  per 
unit,  will  give  us  3  units  of  utility,  which  is  the 
value  of  a  unit  of  goods.  Thus  the  former  pro- 
portion between  the  quantity  of  money  and  its 
value  no  longer  holds. 

A  slight  modification  of  the  above  reasoning  is 
necessary  in  order  to  be  true  to  facts.  We  assumed 
that  the  marginal  utility  of  money  was  fixed  inde- 
pendently of  its  use  as  money,  by  the  demand  for  it 
for  direct  consumption.  This  is  not  wholly  correct. 
The  marginal  utility  of  the  money  is  a  resultant 
of  the  demand  for  money  for  purposes  of  ex 

142 


THE    VALUE    OF    MONEY 

change  and  the  demand  for  the  money  article  for 
other  uses.  Therefore  the  marginal  utility  which 
emerged  would,  perhaps,  not  be  2,  as  we  assumed, 
but  it  could  hardly,  under  any  circumstances,  be 
i^.  We  see,  then,  that  the  value  of  commodity 
money  cannot  be  in  the  inverse  ratio  of  its  quan- 
tity ;  but  that  this  relation  may  hold,  under  the  con- 
ditions assumed,  in  the  case  of  inconvertible  paper 
money.  But  one  of  the  assumed  conditions,  the 
constancy  of  the  volume  of  goods  exchanged,  can 
never  be  realized,  so  that  even  with  this  kind  of 
money  the  proportional  relation  between  value  and 
quantity  fails.  For  if  the  volume  of  goods  changes, 
their  marginal  utility  does  not  change  in  the  same 
ratio.  But  the  value  of  the  money  is  but  the  re- 
flected marginal  utility  of  the  goods. 

The  importance  of  the  conclusion  just  drawn, 
both  in  theory  and  practice,  cannot  be  over- 
emphasized. It  shows  us  that  while  it  is  true  that 
the  value  of  money  has  some  relation  to  the 
quantity,  it  is  not  proportional  to  the  quantity, 
excepting  in  the  case  of  inconvertible  paper ; 
and  even  here  we  may  later  have  to  note  a  limi- 
tation. Even  under  a  purely  monetary  regime, 
such  as  we  have  assumed,  an  increase  or  decrease 
in  the  quantity  of  money  would  affect  prices  in  a 
much  less  degree  than  the  change  in  the  quantity 
might  lead  us  to  expect.  For  the  additional  supply 
in  the  one  case,  and  the  amount  withdrawn  in  the 
other,  would  include  a  portion  devoted  to  other 
than  monetary  purposes.  We  shall  see  later  that 


MONEY 

under  some  circumstances  the  value  of  money  may 
fall  with  a  decrease  of  its  quantity. 

14.  The  Establishment  of  Equilibrium  among  the 
Various  Demands  for  the  Money  Commodity.  —  The 

fixing  of  the  marginal  utility  and  the  value  of 
money,  by  the  establishment  of  an  equilibrium  be- 
tween its  marginal  utilities  for  the  two  classes  of 
uses,  is  important  enough  to  justify  a  somewhat 
more  careful  and  detailed  examination  of  the 
process.  The  demand  for  gold  for  either  of  the 
two  classes  of  purposes,  arts  or  money,  is  not 
simple.  Gold  is  called  for  in  the  fine  arts,  in 
dentistry,  for  personal  adornment,  and  for  many 
other  uses.  Clearly,  the  same  amount  of  gold 
used  in  any  one  of  these  ways  must  afford  an 
amount  of  satisfaction  equal  to  what  would  be 
obtained  from  its  use  in  any  other.  The  value  of 
the  money  commodity  as  fixed  by  the  demand  for 
it  for  use  in  the  arts  is  a  resultant  of  the  rates  of 
exchange  established  for  all  of  these  purposes  ;  but 
we  need  only  consider  the  method  by  which  its 
value  is  established  for  a  single  one  of  them. 

Let  the  cost  of  successive  equal  portions  of  the 
money  material,  which  we  may  assume  to  be 
gold,  be  i,  i.i,  1.2,  1.3,  1.5,  etc.,  of  our  composite 
units  of  goods.  Let  the  number  of  composite 
commodity  units  which  the  holders  of  goods  are 
willing  to  offer  for  successive  units  of  gold  for  use 
in  the  arts  be  2,  1.8,  1.6,  1.3,  etc.  Then  the  value 
of  gold  as  a  commodity  will  be  fixed  at  the  point 
where  the  amount  of  satisfaction  derived  from  the 

144 


THE    VALUE    OF    MONEY 

possession  of  gold,  as  measured  in  terms  of  the 
commodity  unit,  will  equal  the  cost  of  getting 
the  gold  in  terms  of  the  commodity  unit.  The 
amount  of  gold  offered  at  this  rate  will  equal  the 
amount  demanded  at  the  same  rate.  An  equilibrium 
will  be  established  between  demand  and  supply, 
and  the  relative  values  of  the  money  commodity 
and  other  commodities  will  be  thus  fixed. 

The  demand  for  gold  for  use  as  money,  like  the 
demand  for  it  for  the  arts,  is  not  of  a  simple  char- 
acter. Gold  is  used  in  making  direct  payments, 
and  for  a  reserve  to  insure  solvency.  An  equi- 
librium is  established  between  the  marginal  utility 
of  gold  for  these  two  purposes,  and  then  be- 
tween this  equilibrium  and  the  marginal  utility  of 
goods. 

The  value  of  money  as  it  emerges  from  any  set 
of  exchanges  is,  therefore,  the  resultant  of  a  com- 
plex group  of  forces.  To  produce  this  resultant, 
equilibrium  must  be  established  («)  between  the 
cost  of  the  money  article  and  its  value  ;  (£)  between 
its  marginal  utility  for  making  exchanges  and  for 
other  purposes ;  (c)  between  its  marginal  utility 
for  direct  payments  and  for  reserves ;  (d )  between 
its  marginal  utility  to  society  in  making  exchanges 
and  that  of  other  means  of  making  the  exchanges  ; 
(e)  between  its  marginal  utility  and  that  of  the 
goods  it  exchanges  for ;  and  (f)  between  the  cost 
of  the  goods  and  their  marginal  utility.  The  mere 
enumeration  of  these  interdependent  factors  shows 
how  futile  is  the  attempt  to  establish  a  relation  of 

L  145 


MONEY 

simple  proportion  between  the  quantity  of  money 
and  its  value. 

15.  The  Volume  of  Business  and  the  Value  of 
Money.  —  What  has  been  said  does  not  prove  that 
no  relation  between  the  quantity  of  money  and 
prices  exists,  but  that  the  relation  is  not  one  of  in- 
verse proportion,  and  that  it  is  remote  and  indirect 
rather  than  immediate  and  direct.  Somewhere  in 
the  vast  volume  of  exchanges  is  a  demand  for 
money,  standard  money,  for  payment,  which,  in 
conjunction  with  the  demand  for  it  for  other  pur- 
poses, determines  its  value.  For  it  is  not  true  that 
the  demand  for  standard  money  for  use  has  an 
insignificant  effect  on  its  value,  and  that  its  value 
is  fixed  entirely  by  other  than  monetary  demand. 
The  actual  use  is  considerable  notwithstanding, 
and,  indeed,  because  of,  the  vast  volume  of  credit 
exchanges ;  for  the  growth  of  the  total  volume  of 
credit  exchanges  is  likely  to  leave  a  growing  bal- 
ance calling  for  the  direct  use  of  money.  At  any 
moment  the  value  of  the  standard  money  is  fixed 
by  the  interplay  of  competition  between  buyers 
and  sellers  of  gold ;  but  it  is  a  competition  to  buy 
and  sell,  not  gold  in  general,  but  a  definite  amount, 
a  definite  supply.  The  demand  is  not  for  an 
amount  sufficient  to  settle  all  exchanges,  but  suffi- 
cient only  for  the  settlement  of  the  balance  of  ex- 
changes. Now,  the  same  balance  may  represent 
very  different  total  volumes  of  exchanges,  at  dif- 
ferent times,  on  the  same  price  level.  That  is  to 
say,  the  demand  for  money  for  immediate  payment 

146 


THE    VALUE    OF    MONEY 

may  remain  the  same  for  very  different  volumes  of 
business,  or  it  may  be  larger,  or  smaller,  for  the 
same  volume  of  business  at  different  times.  The 
total  volume  of  exchanges,  therefore,  is  not  a  safe 
index  of  the  demand  for  money  for  actual  payment, 
and  a  changing  volume  does  not  imply  need  for  a 
changing  supply  of  money  to  keep  the  same  price 
level.  The  demand  for  money  for  direct  payment, 
added  to  the  demand  for  money  for  reserve,  con- 
stitutes the  total  demand  for  monetary  purposes. 
Now,  the  amount  of  the  money  demand  is  fixed  at 
any  moment  at  the  point  where  the  marginal  util- 
ity of  money  for  direct  payment  and  for  reserves 
equals  its  marginal  utility  for  other  uses.  If  the 
volume  of  exchanges  is  increased,  the  amount  set- 
tled by  direct  payment  may  grow  smaller,  or  larger, 
or  remain  the  same.  If  it  grows  smaller,  money 
may  pass  from  use  for  direct  payments  to  reserves 
just  fast  enough  to  absorb  the  amount  set  free  from 
direct  use.  In  that  case,  the  marginal  utility  of  the 
money  article  for  exchange  purposes  may  not 
change.  That  is,  the  price  level  will  remain  the 
same,  despite  the  change  of  the  total  volume  of 
business.  If  the  reserve  money  does  not  increase 
so  fast  as  that,  the  ratio  of  exchange  will  change 
in  favor  of  the  goods  offered  for  direct  payment, 
and  prices  will  rise,  as  is  evidenced  both  by  the 
fact  that  a  smaller  balance  of  goods  is  offered  for 
the  amount  used  for  direct  payments,  and  that 
there  is  a  larger  demand  for  money  for  indirect 
payments. 


MONEY 

The  price  level,  or  the  value  of  money  is,  there- 
fore, not  the  ratio  of  exchange  between  all  the 
money  and  the  total  volume  of  goods ;  nor  be- 
tween the  amount  of  money  directly  used  in  pay- 
ments and  the  total  volume  of  goods  ;  but  between 
this  last  amount  of  money  and  the  balance  of  ex- 
changes not  settled  by  other  means. 

The  only  way  in  which  a  changing  total  volume 
of  business  can  affect  the  price  level  is  by  varying 
the  balances  to  be  settled  by  direct  payment.  But 
the  relation  between  these  balances  and  the  total 
volume  of  business  which  gives  rise  to  them  is  by 
no  means  constant,  so  that  the  total  volume  of 
business,  and  therefore  the  goods  offered  for  sale, 
bears  no  direct  relation  to  the  quantity  of  money 
available,  and  cannot  exercise  a  direct  influence  on 
the  price  level. 

In  all  this  discussion  it  has  been  assumed  that 
the  quantity  of  standard  money,  that  is,  the 
amount  of  the  money  commodity  used  for  direct 
payments  and  for  reserves,  is  constant.  We  must 
remember,  however,  that  a  change  in  the  value  of 
the  money  commodity  at  any  point  causes  a  new 
distribution  of  the  money ;  therefore,  a  change  in 
prices  in  any  direction  will  be  less  than  if  there 
were  no  non-money  uses  for  the  money  commodity. 
If  we  suppose  a  change  in  the  supply  of  money, 
the  effect  on  prices  will  depend  upon  the  read- 
justment produced  in  the  distribution  of  money 
between  direct  and  indirect  payments.  All  of  the 
additional  supply  may  remain  in  the  service  of 

148 


THE    VALUE    OF    MONEY 

direct  money  exchanges;  or  part  of  it  may  so 
remain,  while  the  rest  becomes  the  basis  of  the 
extension  of  credit  exchanges.  If  the  former  hap- 
pens, and  if  there  is  no  change  in  the  total  volume 
of  exchanges,  the  other  means  of  settlement,  that 
is  by  reserves,  must  decrease  to  the  point  where  a 
new  equilibrium  is  established  between  the  mar- 
ginal utility  of  the  new  balance  of  goods  and  the 
new  supply  of  money  used  in  direct  payments. 

On  the  other  hand,  the  new  supply  of  money 
may  go  mostly  to  facilitate  exchanges  by  indirect 
payments,  that  is,  for  use  as  reserves.  Then  the 
volume  of  exchanges  performed  by  the  indirect 
method  will  increase,  and  the  balance  remaining 
for  direct  money  exchange  will  be  less,  but  not 
in  proportion  to  the  total  increase  of  money,  nor 
in  proportion  to  the  addition  devoted  to  direct 
exchange. 


149 


CHAPTER   IX 

STABILITY   OF  THE   VALUE  OF   MONEY 

REFERENCES  :  see  references  for  preceding  chapter  ;  Marshall, 
A.,  Principles  of  Economics,  3d  ed.,  pp.  185,  208,  319  note,  432 
note,  424,  and  673-674,  note ;  Mill,  J.  S.,  Principles  of  Political 
Economy,  Bk.  III.,  Chs.  8,  9 ;  Nicholson,  J.  S.,  Money  and  Mone- 
tary Problems,  5th  ed.,  pp.  63-64,  68-71;  Pareto,  V.,  Cours 
d'Economie  Politique,  §  306  ;  Philippovich,  E.  von,  Grundriss  der 
Politischen  Oekonomie,  4te  Aufl.,  Erster  Band,  §  94. 

1.  Nature  of  the  Price  Level.  —  The  value  of 
money,  as  we  have  thus  far  considered  it,  results 
from  the  competition  of  buyers  and  sellers  acting 
together  at  one  time.  That  is  to  say,  it  is  the  value 
which  emerges  from  a  single  set  of  exchanges.  It 
is  important  to  determine  how,  if  at  all,  our  con- 
clusions must  be  modified  to  adapt  them  to  condi- 
tions of  business  activity  which  last  long  enough 
to  allow  for  the  occurrence  of  the  ordinary 
vicissitudes  of  trade.  If,  for  the  sake  of  ex- 
ample, we  think  of  the  work  of  a  season,  or 
period,  of  production  as  finished,  and  all  the 
products  brought  together  to  be  exchanged  in 
one  group  of  transactions,  we  will  have  what  is 
here  meant  by  a  single  set  of  exchanges.  Two 
or  more  such  sets  of  exchanges  will  form  a  series. 
A  value  of  money  emerges  from  a  single  set  of 

150 


STABILITY    OF    THE    VALUE    OF    MONEY 

exchanges ;  the  recurrence  of  that  value  from  each 
succeeding  set  of  exchanges  furnishes  the  continu- 
ous level  of  prices  which  is  of  interest  to  business 
men.  The  price  level,  thus  regarded,  is  not  so 
much  the  result  of  lapse  of  time  as  of  a  succession 
of  groups  of  exchanges.  The  value  of  money 
through  such  a  series  of  exchanges  is  not  the 
arithmetical  average  of  the  values  that  emerge 
from  the  single  sets  of  exchanges.  Rather,  as 
has  been  well  said,  it  is  a  mean  "  such  that  had 
it  been  a  constant  price  during  a  period,  the 
amounts  bought  and  sold  would  have  been  just 
what  they  actually  are."  1  The  condition  of  the 
maintenance  of  this  level,  of  the  continuity  of  this 
mean,  are  the  conditions  of  steady  prices.  What 
these  conditions  are,  under  what  circumstances  the 
value  that  emerges  from  a  single  set  of  exchanges 
may  keep  steady,  is  a  question  of  great  practical, 
as  well  as  theoretical,  importance. 

2.  Rapidity  of  Circulation.  —  In  order  to  make 
the  problem  clear,  let  us  assume  that  all  the  con- 
ditions of  the  determination  of  the  value  of  money, 
thus  far  considered,  are  constant.  It  might  seem 
that  if  the  quantity  of  goods  and  the  quantity  of 
money  remain  the  same,  in  two  successive  sets  of 
exchanges,  the  value  of  money  would  not  change. 
This,  however,  does  not  follow.  In  order  to  com- 
plete or  effect  the  first  set  of  exchanges,  the  money 
changes  hands,  or  circulates  a  certain  number  of 

1  Fisher,  I.,  "Mathematical  Investigations  into  the  Theory  of 
Prices,"  Trans.  Conn.  Acad.,  Vol.  IX.,  July,  1892,  p.  21. 


MONEY 

times.  If,  in  performing  the  second  set  of  ex- 
changes whose  total  volume  is  the  same,  the  same 
amount  of  money  changes  hands  a  different  num- 
ber of  times  from  what  it  did  before,  the  resulting 
value  of  money  will  be  different.  The  number  of 
times  which  the  money  changes  hands  in  order 
to  do  a  given  volume  of  business  is  known  as  its 
rapidity  of  circulation.  This  is  an  expression  which 
needs  some  explanation.  The  word  "rapidity" 
suggests  to  the  mind  the  thought  of  time ;  and  the 
common  explanation  of  the  phrase  is,  that  it  is  the 
number  of  times  which  money  changes  hands  in  a 
given  time.  This,  however,  is  hardly  correct. 
It  is  conceivable  that  money  should  change  hands 
twice  as  often  in  one  year  as  in  another,  without 
any  change  at  all  in  the  rapidity  of  circulation, 
using  that  phrase  in  its  proper  sense.  If  the 
price  level  in  the  second  year  is  one-half  what  it 
was  in  the  previous  year,  the  volume  of  business 
done  will  be  the  same  in  the  two  years,  and  the  true 
rapidity  of  circulation  will  be  the  same,  although 
the  money  has  changed  hands  twice  as  often  in  the 
one  case  as  in  the  other.  On  the  other  hand,  if 
the  volume  of  business  doubles,  without  any  change 
in  the  quantity  of  money,  or  in  the  price  level,  the 
rapidity  of  circulation  is  doubled ;  but  it  does  not 
follow  that  the  money  has  changed  hands  twice  all 
around,  instead  of  only  once. 

Again,  if  in  two  communities  the  same  volume 
of  business  is  done  in  a  year,  and  if  the  amount  of 
money  is  the  same  in  each,  while  its  value  in  one 

152 


STABILITY   OF    THE    VALUE    OF    MONEY 

place  is  double  its  value  in  the  other,  and  if  the 
business  of  one  locality  is  done  with  only  half  the 
number  of  transactions  that  occur  in  the  other, 
the  rapidity  of  circulation  is  the  same  in  both,  al- 
though the  money  changes  hands  twice  as  often  in 
the  one  place  as  in  the  other,  in  the  same  period 
of  time.  In  short,  the  rapidity  of  the  passage  of 
money  from  hand  to  hand  must  vary,  not  with  the 
time,  but  inversely  as  the  price  level,  if  the  volume 
of  business  is  constant  and  the  amount  of  money 
used  is  to  remain  unchanged.  The  idea  which  the 
expression  conveys  is  the  amount  of  exchange 
work  which  a  unit  of  money  does  in  a  given  total 
of  business,  and  is  analogous  to  the  thought  con- 
veyed by  the  word  activity,  or  power,  in  mechan- 
ics. It  is  the  proportion  of  a  given  total  amount  of 
work  which  a  given  unit  of  force  is  capable  of 
doing.  It  takes  the  same  amount  of  work  to  raise 
a  ton  of  coal  vertically  ten  feet,  whether  the  work 
be  done  in  a  year  or  in  ten  minutes  ;  by  a  boy  with 
a  bucket,  or  by  a  scoop  which  lifts  the  coal  all  at 
once.  If,  as  Mill  suggests,  we  could  find  another 
phrase,  such  as  efficiency  of  money,  activity  of 
money,  or  power  of  money,  something  might  be 
gained  in  clearness. 

The  desirability  of  a  clear  understanding  of  this 
factor  of  the  price  level  is  great  enough  to  justify 
further  explanation  of  it,  even  at  the  risk  of  tedi- 
ousness.  To  illustrate  it,  let  us  suppose  that  there 
are  ten  people,  one  of  whom  has  one  hundred  units 
of  money  or  dollars,  while  each  of  the  other  nine 


MONEY 

has  an  amount  of  goods  that  will  exchange  for  one 
of  these  units  of  money  or  dollars.  Now,  suppose 
further  that  A,  who  has  the  $100  gives  it  to  B 
in  exchange  for  his  goods  ;  B  gives  it  to  C  in 
exchange  for  his  goods  ;  C  to  D  ;  and  so  on  to 
the  end  of  the  series.  When  all  the  exchanges 
are  completed,  each  quantity  of  goods  has  changed 
hands,  and  the  money  is  in  the  hands  of  the  tenth 
man  instead  of  those  of  the  first.  Each  has  received 
$100  for  his  goods.  The  price  level  is,  therefore, 
one  hundred.  Let  us  suppose,  however,  that  in- 
stead of  giving  all  his  money  directly  to  B,  A 
wishes  to  purchase  at  the  same  moment  from  each 
one  of  the  men  who  has  goods.  In  order  to  do  so, 
he  will  need  as  many  times  $100  as  there  are  indi- 
viduals ready  to  sell,  if  the  price  level  is  to  be  the 
same.  He  will  need,  therefore,  $900.  One  hun- 
dred of  this  he  gives  to  B,  one  hundred  to  C,  and 
so  on.  The  price  level  is  $100  as  before,  but  the 
quantity  of  money  used  in  effecting  the  exchanges  is 
nine  times  as  much.  The  difference  is  due  to  the 
different  rapidity  of  circulation  in  the  two  cases.  It 
will  be  noticed  that  nothing  has  been  said,  and  that 
nothing  needs  to  be  said,  about  the  time  required 
to  perform  the  series  of  exchanges.  Whether 
the  time  be  a  day  or  a  year,  whether  the  time 
required  be  the  same  in  the  two  cases  or  not, 
makes  no  difference.  In  order  to  perform  this 
volume  of  business  in  one  way  we  need  $iooand 
in  order  to  perform  it  in  the  other  way  we  need 
$900. 

154 


STABILITY   OF    THE    VALUE    OF    MONEY 

3.  Influence  of  the  Rapidity  of  Circulation  on 
the  Price  Level.  —  It  is  clear  from  what  has  been 
said  that  if  in  any  way  we  can  increase  the  rapidity 
of  circulation,  the  quantity  of  money  needed  to  do 
a  given  volume  of  business  will  be  smaller ;  and 
that  if  for  any  reason  the  rapidity  of  circulation 
diminishes,  the  quantity  of  money  needed  to  do  the 
same  volume  of  business  must  be  larger,  provided 
the  value  of  money  remain  the  same  in  each  case. 
This  fact  constitutes  an  important  modification  of 
whatever  relation  exists  between  the  quantity  of 
money  and  its  value,  or  the  price  level.  Money 
moves  most  rapidly — that  is,  a  given  amount  per- 
forms a  larger  volume  of  business  —  in  an  indus- 
trial and  commercial  community  that  is  highly 
organized,  where  .  competition  is  active  and  eco- 
nomic opportunities  are  made  the  most  of.  This 
is,  however,  the  kind  of  community  in  which  an 
increasing  amount  of  money  is  constantly  needed, 
because  business  is  constantly  expanding.  The 
very  activity  that  creates  the  demand  for  an  en- 
larged supply  at  the  same  time  creates  influences 
which  make  necessary  a  smaller  supply  than  would 
otherwise  be  the  case.  The  need  for  a  larger 
performance  of  monetary  service  is  met  with  an 
increase  of  intensity  rather  than  of  quantity. 

It  will  thus  be  seen  that  the  rapidity  of  circula- 
tion of  money  is  a  factor  in  the  maintenance  of 
the  price  level,  rather  than  in  its  establishment. 
The  value  of  money  is  fixed,  or  may  be  regarded 
as  fixed,  through  the  action  of  a  single  group  of 

155 


MONEY 

exchanges  coming  at  one  time,  rather  than  through 
a  period.  If,  however,  we  are  to  have  the  same 
value  from  a  second  set  of  exchanges  in  which  the 
quantities  of  money  and  goods  are  respectively  the 
same  as  in  the  first  set,  we  must  have  also  the  same 
rapidity  of  circulation.  At  least  one  writer1  has 
made  the  mistake  of  thinking  that  because  the  ra- 
pidity of  circulation  is  not  an  element  in  determin- 
ing what  we  have  called  the  momentary  value  of 
money,  it  has  therefore  no  effect  on  the  price  level. 
Its  importance  is  in  the  maintenance  of  a  value 
once  fixed  by  the  conditions  present  in  a  particu- 
lar set  of  exchanges. 

4.  Factors  which  affect  the  Rapidity  of  Circula- 
tion. —  The  causes  which  increase  the  efficiency 
or  activity  of  money  are  its  relative  scarcity,  den- 
sity of  population,  improvement  in  means  of  com- 
munication and  transportation,  a  coinage  well 
adapted  to  the  scale  of  prices  and  incomes,  and 
general  prosperity.  Of  course,  if  money  is  rela- 
tively scarce,  men  try  to  make  each  piece  do  more 
work.  In  such  a  condition,  hoarding  is  likely 
to  be  less,  unless,  of  course,  the  hoarding  is  due 
to  panic.  The  influence  of  improved  means  of 
communication  and  transportation,  in  connection 
with  density  of  population,  is  evident  enough. 
Money,  or  its  representatives,  actually  circulates 
in  the  physical  sense  more  easily,  safely,  and 
rapidly  under  such  circumstances.  As  to  the  in- 
fluence of  coinage,  obviously,  if  the  coins  put  out 

1  Mr.  Carlile.     See  his  "  Evolution  of  Modern  Money,"  p.  163. 
156 


STABILITY  OF    THE    VALUE    OF    MONEY 

for  common  use  are  not  adapted  to  make  payments 
in  the  amounts  usual  with  the  mass  of  people,  the 
coins  will  not  be  used.  The  last  influence  men- 
tioned, prosperity,  lends  greater  facility  to  money 
transactions  by  inducing  a  feeling  of  confidence 
among  the  people,  and  therefore  they  spend  their 
earnings. 

The  causes  which  reduce  the  rapidity  of  circula- 
tion of  money  are  fear  of  panic  and  a  low  state  of 
business  activity.  In  an  undeveloped  country,  or 
in  an  agricultural  district,  the  amount  of  money  and 
its  rapidity  of  circulation  might  be  small,  while, 
of  course,  its  purchasing  power,  or  the  price  level, 
might  be  the  same  as  in  a  centre  of  great  indus- 
trial activity,  because  the  volume  of  business  would 
be  correspondingly  small.  Ordinarily,  the  inten- 
sity is  greatest  in  industrial  centres.  In  any  case, 
however,  when  the  volume  of  exchanges  of  a  com- 
munity varies,  the  community  in  its  effort  to  keep 
its  price  level  steady  will  change  either  the  amount 
of  money  it  uses,  or  the  intensity  of  circulation,  or 
both,  so  that,  having  regard  to  their  relative  costs, 
the  marginal  advantage  of  the  two  methods  of 
attaining  its  purpose  will  be  the  same. 

Rapidity  of  circulation  is  a  factor  in  credit,  as 
well  as  in  money,  exchange.  When  applying  the 
term  to  credit  payments,  it  is  perhaps  better  to 
speak  of  it  as  the  mobility  of  balances.  The  easier 
it  is  to  transfer  the  balances  in  the  accounts  of  in- 
dividuals, the  larger  the  amount  of  business  which 
can  be  done  on  the  basis  of  the  same  reserve.  It 


MONEY 

is  evident,  however,  that  the  facility  of  payments 
afforded  by  the  use  of  credit  must  vary  consider- 
ably in  different  countries.  It  depends  mainly  on 
the  development  of  banking  machinery,  and  is 
greater  in  the  United  States  and  England  than 
elsewhere.  Its  effect  on  the  purchasing  power  of 
money  is  similar  in  character  to  the  influence  of 
the  rapidity  of  circulation  of  money  itself. 

5.  Reciprocal  Action  of  Demand  and  Supply  on 
the  Value  of  Money.  — The  second  important  con- 
dition of  the  maintenance  of  the  value  of  money 
which  has  been  fixed  by  a  single  set  of  exchanges 
lies  in  the  influence  which  a  change  in  the  quan- 
tity of  money  has  upon  a  change  in  the  supply  of 
goods.  Up  to  this  point  we  have  supposed  that 
the  supply  of  goods  remained  unchanged,  and 
have  accounted  for  changes  in  the  value  of  money 
by  supposing  changes  in  its  supply,  or  vice  versa. 
In  other  words,  we  have  supposed  that  only  one 
of  these  two  factors  changes  at  a  time.  The  fact 
is,  that  a  change  in  the  one  induces  a  change  in 
the  other.  If  the  supply  of  money  changes,  the 
supply  of  goods  will  for  that  reason  necessarily 
change.  The  goods  offered  at  any  moment  on 
the  market  for  money  are  not  all  the  goods  that 
may  be  offered  ;  they  constitute  the  supply  rather 
than  the  stock.  There  are  others  in  reserve  whose 
cost  of  production  is  such  that  it  will  not  pay  to 
offer  them  for  money  at  the  prevailing  rate.  Let 
the  value  of  money  fall,  and  some  of  this  supply 
will  come  out ;  let  it  rise,  and  some  of  the  supply 

158 


STABILITY   OF    THE    VALUE    OF    MONEY 

already  on  the  market  will  withdraw.  It  is  con- 
trary to  the  facts  of  life  to  believe  that  all  the 
goods  must  remain  on  the  market  and  be  ex- 
changed for  all  the  money.  In  order  to  illustrate 
the  effect  of  this  fact,  let  us  suppose  that  the  sup- 
ply of  money  decreases.  We  regard  the  changes 
now  taking  place  from  the  point  of  view  of  society 
as  a  whole.  We  recall  that,  according  to  our 
theory,  successive  units  of  money  were  added  to 
society's  stock  for  effecting  exchanges,  so  that 
the  marginal  difficulty  of  barter  continually  bal- 
anced the  marginal  utility  of  the  last  unit  of 
money  added.  Now  the  units  of  money  that  are 
withdrawn  when  the  supply  decreases  are  those 
which  replace  the  barter  exchanges  that  represent 
the  smallest  cost  of  all  the  barter  exchanges  which 
were  replaced  with  money  exchange.  A  diminu- 
tion in  the  supply  of  money,  therefore,  leaves  the 
last  unit  used  with  a  higher  marginal  utility. 
That  is,  the  value  of  money  has  risen  because  of 
its  diminution.  Now,  the  common  assumption  is 
that  the  same  quantity  of  goods  will  still  be  of- 
fered, and  that  the  value  of  money  will  therefore 
vary  inversely  as  its  quantity,  or  in  some  fixed  pro- 
portion to  its  quantity.  Part  of  the  effect  of  a 
variation  in  the  quantity  of  money  will  be  felt, 
of  course,  in  changing  its  value ;  but,  theoretically, . 
the  change  would  spend  itself  in  several  ways. 
Since  the  marginal  utility  of  money  has  risen, 
there  would  be,  in  theory,  less  loss  now  in  using 
barter  as  a  means  of  exchange  for  those  units  of 


MONEY 

goods  whose  marginal  utility  is  less  than  the  mar- 
ginal utility  of  money.  Suppose  that  the  cost  of 
exchange  of  a  marginal  unit  of  a  given  amount 
of  goods  was  one  unit  by  barter  and  .9  of  a  unit 
by  money  exchange.  When  the  money  supply 
diminishes,  and  the  value  of  a  marginal  unit  of 
money  rises,  the  cost  of  exchange  of  this  same 
quantity  of  goods  by  money  exchange  might  be- 
come i.i  unit.  Then  it  would  be  cheaper  to  resort 
to  barter,  and  the  supply  of  goods  offered  for 
money  would  be  less.  That  is  to  say,  a  diminu- 
tion in  the  supply  of  money  has  directly  induced 
a  corresponding  diminution  in  the  supply  of 
goods,  so  that  the  demand  for  money  has  fallen 
off.  Hence,  its  value  cannot  rise  in  proportion  to 
the  diminution  in  its  quantity. 

6.  Effect  of  Possible  Resort  to  Barter  or  Credit 
Exchange  on  the  Value  of  Money.  —  This  con- 
sideration, however,  is  purely  theoretical,  and  can 
hardly  ever  be  realized.  For  the  expense  of  resort- 
ing to  barter,  when  barter  has  once  been  aban- 
doned, is  so  great,  that  only  a  catastrophic  change 
in  the  quantity  of  money  would  cause  it.  The 
investment  that  society  has  made  in  the  money 
means  of  exchange  is  such  that  it  will  cause  a 
smaller  loss  to  society  to  continue  the  money  ex- 
change at  a  loss,  than  to  throw  away  a  consider- 
able portion  of  its  investment. 

There  is,  however,  another  method  of  performing 
exchanges,  to  which  society  may  resort  as  cheaply 
as  by  increasing  the  money  exchange.  The  credit 

1 60 


STABILITY   OF    THE    VALUE    OF    MONEY 

exchanges  may  be  increased  as  the  value  of  money 
rises.  That  is  to  say,  there  may  be  a  relative 
increase  in  the  amount  of  credit  paper  used  in 
payments.  For  the  increase  in  the  value  of 
money  makes  possible  a  larger  business  on  the 
same  reserve.  Doubtless  a  rise  in  the  value  of 
money  would  cause  some  diminution  of  the  amount 
used  as  a  reserve,  and  the  remainder  so  used 
would  support  a  volume  of  credit  larger  in  pro- 
portion to  the  whole  volume  of  payments.  The 
volume  of  exchanges  performed  through  credit 
may,  under  such  circumstances,  decrease  abso- 
lutely, but  yet  form  the  larger  proportion  of  the 
total  volume  of  payments. 

For  the  reason  already  mentioned,  practically 
no  change  in  the  way  of  increasing  exchange  by 
barter  can  be  effected.  The  sphere  of  credit  ex- 
change, however,  is  very  flexible,  and  the  play 
between  direct  and  indirect  money  exchange  is 
easy.  If  the  amount  of  money  available  is  not  suf- 
ficient to  effect  the  exchanges  of  society  directly 
without  a  considerable  rise  in  its  value,  part  of  it 
may  be  made  to  effect  a  larger  volume  of  payments 
through  indirect  exchange,  and  the  rise  in  its  value 
thus  be  checked.  If  the  quantity  increase,  so  that 
it  becomes  less  expensive  to  use  money  than  to 
maintain  a  credit  machinery  to  effect  certain  pay- 
ments, the  proportion  of  credit  payments  may  be 
diminished.  For  there  is  some  minimum  of  pay- 
ment for  the  discharge  of  which  it  just  pays  to  use 
the  machinery  of  credit.  It  is  here  that  the  mar- 
M  161 


MONEY 

ginal  utility  of  the  credit  mechanism  is  equal  to  its 
cost  of  service,  and  is  equal  also  to  the  marginal 
utility  of  direct  money  exchange.  Of  course  if  the 
quantity  of  money  increases,  effects  the  opposite 
of  those  described  would  ensue. 

From  these  considerations  it  would  seem  that, 
under  some  conditions,  the  quantity  of  money,  as 
well  as  the  volume  of  business,  might  remain  con- 
stant, and  yet  a  change  in  the  value  of  money 
might  be  brought  about  by  a  change  in  the  re- 
lation between  the  different  methods  of  exchange. 
Society  may  exchange  goods  by  barter,  or  by  means 
of  credit,  or  by  money.  Here,  as  elsewhere,  when 
society  has  a  choice  of  means  of  accomplishing  its 
purpose,  it  will  use  the  most  profitable  ;  that  is,  the 
one  which  offers  the  largest  net  return,  if  there  is 
a  difference  among  them.  Society,  therefore,  will 
make  its  exchanges  by  barter,  by  money,  or  by 
credit  mechanism,  and  the  extent  of  the  net  gain 
from  the  use  of  each  will  be  the  same ;  that  is, 
their  marginal  utilities  in  serving  society  must  be 
in  equilibrium. 

7.  Effect  of  a  Change  in  the  Quantity  of  Money 
on  Production.  —  Besides  the  influence  which  a 
change  in  the  quantity  of  money  may  have  in 
changing  the  offerings  of  goods  actually  on  hand, 
it  is  likely,  also,  to  influence  production,  so  that  in 
another  period  of  exchange  more  or  less  goods 
will  be  offered  according  to  the  direction  of  the 
change  in  prices.  This  influence,  however,  espe- 
cially when  money  is  rising  in  value  and  prices  of 

162 


STABILITY   OF    THE    VALUE    OF    MONEY 

goods  are  falling,  is  likely  to  be  lessened  by  the 
retarding  influence  of  invested  capital  in  prevent- 
ing a  rapid  diminution  of  product.  With  a  large 
fixed  capital,  it  is  better  to  continue  producing  at 
some  loss  than  not  to  produce  at  all.  For  a  time, 
therefore,  the  supply  of  goods  would  not  diminish 
as  rapidly  as  falling  prices  might  justify  us  in 
expecting.  It  is  possible,  moreover,  that  the  fall- 
ing price  level  might  stimulate  producers  to  im- 
provements that  would  lead  to  a  lessened  cost  of 
producing  goods.  In  that  case,  a  given  supply 
of  goods  would  soon  be  produced  at  a  cost  which 
would 'off  set  the  increased  value  of  money,  so  that 
the  equilibrium  between  the  cost  of  goods  and  the 
value  of  money  would  not  vary  much  from  what  it 
was  before  the  quantity  of  money  and  its  marginal 
utility  changed. 

8.  The  Cost  of  Production  of  the  Money  Article 
and  its  Value.  —  We  cannot  leave  the  question  of 
the  influence  of  the  quantity  of  money  on  its  value 
without  further  consideration  of  the  effect  of  its 
cost  on  prices.  We  have  found  reason  for  think- 
ing that  the  cost  has  no  effect;  that  the  value  at 
any  moment  is  independent  of  the  cost,  being  fixed 
altogether  by  the  play  of  supply  and  demand  at  a 
point  determined  by  the  subjective  valuations  of 
the  buyers  and  sellers.  If  money  were  very  per- 
ishable, so  that  it  could  perform  only  a  few  ex- 
changes, its  cost  of  production,  if  considerable, 
would  very  materially  affect  its  value  ;  but  the  fact 
that  it  performs  its  services  through  an  indefinite 

163 


MONEY 

number  of  exchanges,  completely  alters  the  situa- 
tion, and  prevents  the  cost  from  having  any  effect 
on  its  present  value.  These  conclusions  can  best 
be  tested  by  considering  the  effect  which  the  an- 
nual production  of  gold  and  its  cost  have  upon  its 
purchasing  power. 

The  normal  market  price  of  goods  ordinarily 
has  a  definite  relation  to  their  cost  of  production. 
Unless  the  price  received  for  them  is,  in  the  long 
run,  sufficient  to  warrant  the  expense  of  produc- 
tion, they  will,  of  course,  cease  to  be  made.  This 
is  not  so,  however,  in  the  case  of  gold.  For  sev- 
eral reasons  there  has  been,  in  the  past,  no  relation 
between  the  cost  of  gold  and  its  value.  In  the 
first  place,  until  a  very  recent  time,  the  production 
of  gold  has  not  been,  properly  speaking,  economic. 
That  is,  it  has  not  been  carried  on  as  a  business, 
for  profit.  From  the  earliest  times  gold  has  had 
for  men  a  peculiar  fascination,  which  has  led  them 
to  endure  and,  indeed,  to  court  all  hardships  and 
dangers  in  order  to  procure  it.  The  fascination  of 
prospecting  for  gold,  the  desire  to  get  rich  quickly, 
has  been  at  the  bottom  of  nearly  all  the  uneco- 
nomic production  of  the  metal  from  the  earliest 
times.  Men  have  seen  and  have  been  attracted 
by  the  gold  accumulated  by  the  few  who  have  been 
successful  in  their  search  for  it,  and  have  con- 
stantly forgotten  the  losses,  the  hardships,  and  the 
sacrifices  of  life  and  property,  suffered  by  the  much 
larger  number  who  have  been  unsuccessful.  Where 
one  has  succeeded,  probably  hundreds  have  failed 

164 


STABILITY  OF    THE    VALUE    OF    MONEY 

in  their  efforts  to  secure  a  sufficient  amount  of  the 
precious  metal  to  offset  their  labor  in  seeking  for 
it.  Considering  the  gold  possessed  by  the  world, 
as  a  whole,  therefore,  every  ounce  of  it  has  cost 
many  times  its  purchasing  power. 

The  second  reason  for  the  lack  of  a  definite 
relation  between  the  cost  of  production  of  gold 
and  its  usual  purchasing  power  is  to  be  found  in 
the  relative  smallness  of  the  amount  produced  in 
a  year,  or  in  any  short  period  of  time,  compared 
with  the  quantity  in  existence.  The  value,  of 
course,  is  determined  by  the  whole  supply  offered 
on  the  market,  and  not  by  the  annual  supply. 
The  addition  of  a  few  hundreds  of  thousands,  or 
even  millions,  of  dollars  in  a  year  could  have 
very  little  influence  on  the  many  millions  which 
constitute  the  large  accumulation  of  the  centuries 
through  which  the  world  has  used  gold. 

9.  The  Production  of  the  Precious  Metals.  —  Of 
course,  as  the  stock  of  gold  has  been  increased  by 
new  discoveries,  a  change  in  the  purchasing  power 
of  the  metal  has  occurred,  manifested,  perhaps, 
in  more  or  less  lengthy  periodic  changes  in  the 
general  level  of  prices.  This  change,  however, 
was  due  to  the  fact  that  the  supply  was  larger 
and,  irrespective  of  its  cost  of  production,  could 
not  maintain  its  old  purchasing  power  if  other 
things  remained  the  same.  Economic  history 
shows  periods  of  variation  in  the  supply  of  the 
world's  metallic  money.  At  the  beginning  of  the 
Christian  era,  Mr.  Jacob  estimates  that  the  amount 
165 


MONEY 

of  gold  and  silver  money  in  existence  was  about 
358,000,000  pounds  sterling;  that  at  the  beginning 
of  the  ninth  century,  this  amount  was  reduced  to 
33,674,256  pounds  sterling ;  and  that  for  seven 
•  hundred  years  afterward,  the  annual  wear  and 
tear  just  offset  the  annual  production,  so  that 
there  was  no  real  addition  to  the  world's  supply. 
In  1545  the  silver  mines  of  Potosi  were  discovered, 
and  the  metal  furnished  from  America  increased 
the  average  annual  supply  to  2.25  million  Pounds. 
This  state  of  affairs  lasted  for  something  like 
fifty  years. 

Mr.  Jacob  estimates  the  stock  of  gold  and  silver 
available  as  money,  in  Europe,  in  the  last  years 
of  the  sixteenth  century  at  130,000,000  Pounds. 
During  the  next  one  hundred  years  the  annual 
production  of  these  metals  became  3,375,000 
Pounds,  and  at  the  end  of  the  seventeenth  century 
the  stock  of  money  had  become  297,000,000 
Pounds.  During  the  following  century  the  silver 
of  Mexico  was  added  to  the  supply,  yielding 
a  net  stock  of  money  for  the  world,  estimated  at 
380,000,000  Pounds,  by  1810.  During  the  follow- 
ing quarter  of  a  century  there  was  a  falling  off  in 
production,  and  the  net  stock  available  for  mone- 
tary purposes,  in  1829,  was  estimated  at  only 
313,388,560  Pounds.  Soon  after  this  time  gold- 
bearing  sands  were  found  in  Siberia,  and  in 
1848-1850  the  world's  supply  was  increased  by 
the  discoveries  in  California  and  Australia.  These 
discoveries  augmented  the  annual  production  of 

166 


STABILITY   OF    THE    VALUE    OF    MONEY 

gold  until  about  1860,  when  there  came  a  falling 
off  which  lasted  until  1896,  although  the  quan- 
tity of  silver  in  the  meantime  had  very  largely 
increased. 

In  recent  years  the  discoveries  in  Alaska  and 
South  Africa,  as  well  as  new  treatment  of  old  ores 
in  Colorado  and  elsewhere,  have  added  largely  to 
the  world's  stock.  "The  1899  product  is  nearly 
nine  times  larger  than  the  production  at  the  time 
of  the  California  discoveries  ;  it  is  greater  than  the 
combined  production  of  gold  and  silver  (at  coining 
value)  in  1891,  when  the  world's  production  of 
silver  reached  its  high-water  mark,  and  greater 
also  than  the  combined  production  of  both  metals 
in  each  of  the  subsequent  three  years  (up  to  and 
including  1894)."  1 

10.  The  Influence  of  the  Increased  Production  of 
Gold  on  its  Value.  — •  The  question  may  fairly  be 
asked  whether,  in  view  of  the  great  increase  in  the 
annual  production,  the  doctrine  that  the  annual 
product  of  gold  has  no  appreciable  influence  on 
its  purchasing  power  must  not  be  modified.  The 
quantity  now  annually  produced  is  a  very  much 
larger  percentage  of  the  total  stock  than  was  the 
case  at  any  other  time  in  the  world's  history. 
Moreover,  gold  mining  is  rapidly  becoming  re- 
duced to  the  condition  of  a  regular  business,  sub- 
ject to  capitalistic  methods  of  production  and 
management,  and  largely  freed  from  the  acciden- 

1  Director  of  the  Mint :  Report  on  Production  of  the  Precious 
Metals,  1899,  p.  45. 

167 


MONEY 

tal  features  that  have  characterized  it  throughout 
the  world's  history  hitherto.  A  yearly  addition 
amounting  to  twenty  per  cent,  of  the  total  existing 
stock  must  have  considerable  influence  on  the 
purchasing  power  of  the  metal,  so  that  we  must 
admit  that  the  annual  production  to-day  is  a  more 
disturbing  factor  than  it  has  been  in  the  past.  Its 
cost  has  doubtless  been  less,  and  certainly  has 
been  more  exactly  ascertainable,  and  may  have 
been  low  enough  to  depress  the  value  of  the 
whole  to  some  degree.  But,  after  all,  it  is  the 
current  value  that  determines  the  limits  of  profit- 
able cost.  It  fixes  the  cost  of  production  that  the 
purchaser  can  afford  to  incur.  Therefore,  the 
more  rapidly  gold  mining  becomes  a  regular  busi- 
ness, in  which  large  capital  is  invested,  the  more 
sensitive  will  it  be  to  changes  in  the  purchasing 
power  of  the  vast  stock  in  the  world's  possession. 
When  the  cost  of  production  is  such  as  to  offer 
only  the  usual  margin  of  profit,  a  fall  in  the  pur- 
chasing power  of  money  will  very  quickly  be  re- 
flected in  a  diminution  of  the  output.  Therefore, 
whatever  the  annual  production,  as  soon  as  the 
industry  has  assumed  the  character  of  a  settled 
business,  the  disturbing  influence  of  the  annual 
variations  in  production  will  be  minimized. 

There  is  still  another  reason  for  believing  that 
the  annual  production,  however  large,  cannot  cause 
any  great  change  in  the  purchasing  power  of  the 
stock  already  on  hand.  The  product,  whatever  it 
is,  finds  its  way  into  the  world's  business  through 

168 


STABILITY   OF    THE    VALUE    OF    MONEY 

the  banks.  The  first  effect  of  an  increased  supply 
is  to  stimulate  discounts  and  to  cause  an  expansion 
of  business  done  on  credit.  The  result,  of  course, 
is  to  increase  the  supply  of  goods  offered  for  gold, 
and  therefore  to  raise  the  price  of  gold.  This  in- 
fluence will  in  time  counteract  any  influence  due 
to  an  increase  in  the  annual  production.  What- 
ever effect  the  recent  great  production  may  have 
had  in  raising  prices  is  attributed  to  the  fact  that 
the  increased  quantity  has  been  produced  at  a  cost 
approximately  equal  to,  or  less  than,  the  existing 
purchasing  power  of  gold.  An  increased  supply 
will  soon  lower  this  purchasing  power,  and  dimin- 
ish the  profitableness  of  mining  at  the  present 
cost  of  production.  The  result  will  be  a  tempo- 
rary check  to  investment  in  gold  mining,  so  far 
as  it  is  carried  on  as  a  business  by  invested 
capital. 

It  is  true,  to  be  sure,  that  a  diminution  of  the 
profit  in  gold  mining  will  stimulate  further  im- 
provements to  produce  it  at  a  lower  cost  as  its 
purchasing  power  falls.  This  influence  will  work 
against  a  rise  in  the  purchasing  power,  as  it  does 
in  the  case  of  all  other  goods.  We  may  therefore 
expect  in  the  future  that,  as  gold  mining  becomes 
more  and  more  subjected  to  the  influence  of  a 
capitalistic  regime,  we  shall  have  a  more  regular 
periodicity  in  its  production  and  value,  and  periods 
of  great  increase  will  be  shorter,  while  its  purchas- 
ing power  will  fluctuate  less  as  mining  becomes 
more  and  more  a  regular  business. 

169 


MONEY 

There  is  no  reason  to  expect  any  early  diminu- 
tion of  the  great  supply  of  gold.  The  supply  has 
increased  because  gold  became  scarce  enough  to 
raise  its  price  to  a  point  which  justified  a  larger 
expense  in  producing  it.  "  There  is  no  reason  to 
expect  any  cessation  of  this  annual  increase  for 
some  years  to  come.  The  Transvaal  has  not 
nearly  reached  its  limit ;  Australia,  particularly 
West  Australia,  is  not  yet  half  developed ;  Alaska 
and  the  Yukon  have  only  fairly  begun  to  produce, 
while  the  recent  steady  increase  in  Colorado  and 
other  Western  states  shows  no  signs  of  abating. 
The  present  output  differs  from  that  in  the  fifties, 
when  the  California  placers  yielded  such  enormous 
stores  of  gold,  because  these  could  be  exhausted, 
more  or  less  speedily,  while  the  present  yield 
comes  from  the  working  of  low-grade  ore,  ren- 
dered profitable  by  improved  modern  methods 
of  reduction,  and  is  practically  unlimited." 1 

From  all  the  considerations  which  have  been 
adduced,  it  is  very  obvious  that  the  effects  of 
changes  in  the  quantity  of  money  on  its  value 
are  very  complex  and  difficult  to  trace.  An  in- 
crease or  decrease  of  the  quantity  may,  or  may 
not,  be  reflected  in  the  price  level  at  all,  or  not 
to  a  degree  that  has  any  correspondence  whatever 
with  the  change  in  the  quantity.  For  (i)  contem- 
poraneous with  a  change  in  the  quantity  of  the 
money  article  may  be  a  demand  for  it  for  other 

1  Director  of  the  Mint:  Report  on  Production  of  the  Precious 
Metals  for  1899,  p.  45. 

170 


STABILITY  OF    THE    VALUE    OF    MONEY 

uses ;  (2)  the  intensity  of  circulation  will  be  likely 
to  change ;  (3)  the  supply  of  goods  will  almost 
certainly  change,  and  produce  an  effect  opposite 
to  that  of  the  supply  of  money ;  (4)  the  change 
may  react  on  other  methods  of  making  payments, 
especially  the  use  of  credit  paper,  in  such  a  way 
as  to  offset  its  own  effect. 

11.  The  Cost  of  its  Money  Supply  to  a  Country. 
—  Up  to  this  point  our  discussion  has  concerned 
the  general  value  of  money,  the  value  to  the  world 
as  a  whole,  and  for  goods  in  general  as  typified 
by  our  ideal  composite  commodity  unit.  We  have 
found  that  this  value,  or  purchasing  power,  or  price 
level,  as  it  is  variously  called,  depends,  in  the  last 
analysis,  on  the  service  which  money  renders,  and 
that  the  evident  measure  of  this  is  what  we  must 
give  to  get  money.  But  the  general  value  of 
money  is  nowhere  realized.  Goods  are  not  sold 
in  composite  lumps,  and  the  relative  prices  of 
goods,  as  well  as  the  general  price  level,  are  an 
important  matter  for  consideration.  The  general 
value  of  money  could  be  realized  only  if  competi- 
tion were  perfect  and  intelligent,  knowledge  of 
economic  conditions  equal,  and  the  distribution  of 
money  costless.  As  in  the  case  of  every  other 
economic  activity,  none  of  these  conditions  is 
realizable.  Hence,  we  must  expect  to  find  differ- 
ent values  for  money  in  different  places,  and  to 
find  that  changes  in  its  quantity  affect  its  relative 
values  differently  in  different  places. 

The  local  value  of  money  depends  on  the  value 
171 


MONEY 

of  the  things  that  must  be  given  for  it.  Goods 
have  different  values  to  different  people,  so  that 
some  may  get  a  given  quantity  of  money  for  less 
than  others.  This  law  of  the  relative  value  of 
money  for  different  places  is  not  different  from  the 
law  that  fixes  the  general  value  of  money.  The 
marginal  utility  of  the  money  secured  must  equal 
the  marginal  utility  of  the  goods  given.  It  follows 
that  the  bullion  which  a  country  requires  "  will 
always  cost  as  much  to  that  nation  in  services  of 
all  kinds  as  the  production  of  the  articles,  in 
return  for  which  the  bullion  is  obtained."  1 

It  follows  that  one  country  may  get  its  supply  at 
less  cost  than  another.  The  one  to  which  the 
cost  is  greater  would  probably  be  satisfied  with  a 
smaller  quantity.  If,  now,  the  total  volume  of  busi- 
ness, rapidity  of  circulation,  and  other  conditions 
were  the  same  in  both,  the  price  level  would  be  dif- 
ferent in  the  two.  Obviously,  then,  the  value  of 
money  in  a  country  is  influenced  in  a  measure  by 
the  ratio  of  exchange,  or  relative  costs  of  produc- 
tion, of  goods  between  itself  and  the  countries  with 
which  it  trades. 

12.  Changes  in  Relative  Prices  consequent  on 
Changes  in  General  Prices.  —  Hence,  a  change  in 
the  price  of  its  exports  will  change  relative  prices 
within  a  country.  Suppose  a  country  has  two 
commodities,  A  and  /?,  only  A  being  exported.  If 
one  unit  of  A  exchanges  for  $2  and  also  for  3 
units  of  B  within  the  country,  then  $2  will  buy  3 

1  N.  G.  Pierson,  "Principles  of  Economics,"  pp.  369-370. 
172 


STABILITY   OF    THE    VALUE    OF    MONEY 

units  of  B  and  the  price  of  one  unit  of  B  will  be 
.66|.  Suppose,  now,  that  the  foreign  demand  for 
commodity  A  increases,  and  forces  its  price  up  to 
$3  for  one  unit  of  it.  Then  the  marginal  utility  of 
A  will  rise,  and  one  unit  of  it  will  exchange  for 
more  of  commodity  B  than  it  did  before.  Instead 
of  exchanging  for  3  units  of  B,  it  will  now  exchange, 
let  us  say,  for  3.5  units  of  B.  But  one  unit  of  A 
now  exchanges  for  $3  ;  therefore  3.5  units  of  B  will 
also  be  priced  at  $3,  and  one  unit  of  B  will  sell  for 
.81.  The  result  is  not  only  a  rise  in  the  price  of 
both  articles,  but  a  change  in  their  relative  exchange 
values.  A  similar  effect  in  changing  the  relative 
prices  is  caused  by  a  curtailment  in  expenditure, 
brought  about  by  a  diminution  of  the  quantity  of 
money.  For  such  a  reduction  in  expenditure  would 
cut  off  the  demand  for  different  goods  in  varying 
degrees.  A  change  of  ten  per  cent.,  for  example, 
in  the  supply  of  wheat  will  cause  a  greater  change 
in  its  price  than  a  change  of  perhaps  six  per  cent, 
will  cause  in  the  price  of  steel  rails  or  woollen 
cloth.  The  elasticity  of  demand,  as  it  is  called,  is 
not  the  same  for  all  articles,  and  it  is  not  constant 
for  any  one  article  throughout  the  whole  course  of 
its  sale  from  a  single  unit  to  the  point  of  saturation 
of  demand.  Consequently,  a  falling  off  in  the  sup- 
ply of  money  would  possibly  cause  a  cessation  of 
demand  for  some  things,  a  greatly  reduced  demand 
for  others,  and  scarcely  any  change  in  the  demand 
for  still  others.  The  composition  of  our  composite 
unit  of  commodity  would  change.  Instead  of  1.5  X, 


MONEY 

2  Y,  3  Z,  and  3.5  U  going  to  make  up  our  typi- 
cal unit,  we  might  have  1.5  Y,  2  Z,  2.5  £7.  This 
would  imply  a  change  both  in  the  price  level 
and  in  relative  prices.  A  change  in  relative  prices 
would  also  be  caused,  of  course,  by  an  increase 
in  the  supply  of  money,  if  it  raised  prices  so  as 
to  expand  the  demand  for  goods  of  different 
kinds.  For  the  enlarged  demand  would  expend 
itself  on  different  goods  with  varying  intensity. 
No  matter  in  what  way  relative  prices  changed, 
however,  the  individual  money  holder  would,  of 
course,  always  spend  his  money  so  that  the 
marginal  utilities  of  the  last  units  of  the  goods 
which  he  purchases  with  the  same  quantity  of 
money  would  be  proportional  to  their  prices.  For, 
as  Professor  Irving  Fisher  had  pointed  out,  the 
theory  of  marginal  utility  in  relation  to  prices  "  is 
not,  as  sometimes  stated,  '  the  marginal  utilities  to 
the  same  individual  of  all  articles  are  equal,'  much 
less  is  it  '  the  marginal  utilities  of  the  same  article 
to  all  consumers  are  equal ' ;  but  the  marginal 
utilities  of  all  articles  consumed  by  a  given  indi- 
vidual are  proportional  to  the  marginal  utilities  of 
the  same  series  of  articles  for  each  other  consumer, 
and  this  uniform  continuous  ratio  is  the  scale  of 
prices  of  those  articles."  l 

In  other  words,  let  us,  for  the  sake  of  simplic- 
ity, imagine  all  the  goods  in  each  country  fused 
into  our  typical  or  composite  units.  The  utility  of 

1  "  Mathematical  Investigations  in  the  Theory  of  Value  and 
Prices,"  Trans.  Conn.  AcaJ.,  Vol.  IX,  July,  1892,  p.  37. 


STABILITY   OF    THE    VALUE    OF    MONEY 

the  marginal  unit  may  be  regarded  as  the  resultant 
of  the  marginal  utilities  of  the  component  parts, 
and  will  equal  the  marginal  utility  of  the  money. 
But  the  marginal  utility  of  the  composite  unit  of 
goods  differs  for  different  countries.  In  still  other 
words,  we  may  say  that  the  last  unit  of  commodity 
bought  has  a  utility  equal  to  that  of  the  money 
given ;  but  the  marginal  utility  of  different  com- 
modities is  different  for  different  countries  ;  hence, 
so,  too,  is  the  value  of  money. 


CHAPTER  X 


THE  SIGNIFICANCE  AND  CAUSES  OF  CHANGES  IN 
THE  VALUE   OF   MONEY 

REFERENCES  :  Denis,  La  depression  Economique  et  Sociale  et 
1'histoire  des  Prix,  Ixelles-Bruxelles,  1895;  Edgeworth,  F.  Y., 
Thoughts  on  Monetary  Reform,  Econ.  Journ.,  Vol.  V.,  pp.  434-451  ; 
Ettinger,  Einfluss  der  Goldwahrung  auf  das  Einkommen  der 
Bevolkerungsklassen  und  des  Staates ;  Farnam,  H.  W.,  Some 
Effects  of  Falling  Prices,  Yale  Review,  August,  1895,  pp.  183-201; 
Giffen,  R.,  Prices  and  Income  Compared,  Journ.  of  Royal  Statistical 
Society,  Vol.  51,  p.  713  ;  Laughlin,  J.  L.,  Principles  of  Money,  pp. 
388  ff.;  Nicholson,  J.  S.,  Money  and  Monetary  Problems,  5th  ed.,  Pt. 
I.,  Chs.  5,  7,  Pt.  II.,  Chs.  4,  6 ;  Philippovich,  E.  von,  Grundriss  der 
Politischen  Oekonomie,  4te  Aufl.,  Erster  Band,  §  98 ;  Pierson, 
N.  G.,  Index  Numbers  and  Appreciation,  Econ.  Journ.,  Vol.  V.,  pp. 
239  ff.;  Principles  of  Economics,  Ch.  7,  §  8 ;  Price,  L.  L.,  Money 
in  its  Relations  to  Prices,  Ch.  2  ;  Smart,  W.,  Studies  in  Economics, 
Chs.  6,  7,  pp.  208  ff.;  Walker,  F.,  Money,  Ch.  4. 

1.  Questions  to  be  discussed  in  this  Chapter.— 
There  are  three  questions  of  importance  involved 
in  the  discussion  of  changes  in  the  value  of  money. 
These  are :  First,  in  what  direction  and  to  what 
extent  has  the  value  of  money  varied  ?  Second, 
are  the  changes  in  its  value  to  be  attributed  to 
the  money  or  to  goods  ?  Third,  how  do  the  vari- 
ations affect  social  welfare  ?  The  first  of  these 
three  questions  is  discussed  at  length  in  the 
twelfth  chapter.  The  question  is  one  of  quantita- 

176 


CHANGES    IN    THE    VALUE    OF    MONEY 

tive  change,  a  determination  of  the  total  result. 
To  answer  this  question  it  is  not  important  to  know 
whether,  as  has  been  remarked,  it  is  "  the  pence 
that  are  few  or  the  eggs  that  are  many  "  ;  and  it  is 
a  matter  of  indifference,  from  this  point  of  view, 
whether  the  change  is  a  consequence  of  variations 
in  the  prices  of  many  articles  or  of  few.  Further, 
it  does  not  make  any  difference  what  the  effect  is 
on  any  or  all  individuals. 

2.  Different  Meanings  of  Appreciation  and  Depre- 
ciation.—  The  discussion  of  the  twelfth  chapter  will 
show  us,  however,  that  the  terms  "  appreciation  " 
and  "  depreciation,"  of  themselves,  tell  us  nothing  of 
the  real  character  of  the  changes  in  the  price  level, 
the  causes  of  these  changes,  or  their  import  to 
social  welfare.  But  the  answer  to  the  second 
question,  relating  to  the  cause  of  change  in  the 
value  of  money,  involves  a  determination  of  the 
meaning  of  appreciation  and  depreciation.  Appre- 
ciation, of  course,  means  simply  a  change  to  a 
higher  value  ;  depreciation,  a  change  to  a  lower 
value.  But  the  value  referred  to  may  be  a  subjec- 
tive value  or  an  exchange  value.  Much  of  the 
discussion  concerning  the  real  nature  of  apprecia- 
tion has  been  due  to  confusion  of  the  two  kinds  of 
value.  A  change  in  the  subjective  value  does  not 
necessarily  imply  a  change  in  the  purchasing 
power,  or  exchange  value,  of  money.  To  illustrate 
this,  let  us  suppose  that  we  are  using  a  commodity 
money,  like  gold.  If  the  supply  decreases  through 
wear,  for  example,  no  new  supply  coming  to  re- 

N  I77 


MONEY 

plenish  the  loss ;  and  if  at  the  same  time  the  goods 
offered  in  exchange  for  gold  decrease  to  a  sufficient 
degree,  it  is  entirely  possible  that  the  purchasing 
power  of  gold  will  remain  unchanged,  notwith- 
standing the  diminution  of  its  quantity.  Yet  in 
one  sense  gold  will  have  appreciated,  for  it  is 
scarcer  than  it  was,  and  its  scarcity  raises  its  mar- 
ginal utility.  But  as,  according  to  our  supposition, 
the  marginal  utility  of  the  goods  offered  for  it  has 
changed  in  the  same  degree,  no  difference  appears 
in  the  amount  of  goods  secured  for  one  unit  of 
gold.  That  is,  the  purchasing  power  of  gold  has 
not  changed.  For  example,  suppose  we  have  one 
thousand  units  of  gold  and  one  thousand  of  our 
composite  units  of  goods.  Call  the  marginal  utility 
of  each  unit  of  gold  and  of  each  unit  of  goods  one. 
If  now  the  amount  of  gold  is  reduced  to  nine  hun- 
dred units  and  the  volume  of  goods  is  correspond- 
ingly reduced,  a  unit  of  gold  will  command  the 
same  quantity  of  goods  and  the  marginal  utility  of 
the  unit  of  gold  and  that  of  the  unit  of  goods  will 
be,  perhaps,  i|-,  or  2,  or  some  other  number  larger 
than  i.  The  same  amount  of  gold  buys  the  same 
quantity  of  goods  as  before,  but  this  quantity  of 
goods  yields  a  less  amount  of  satisfaction.  Simi- 
larly, there  may  be  depreciation  of  gold  not  shown 
in  changed  purchasing  power.  It  is  possible  that 
the  cost  of  production  of  gold  may  diminish  and 
that  gold  may  increase  in  quantity ;  but  if  these 
changes  are  accompanied  by  corresponding  changes 
in  the  cost  of  production  of  goods,  there  may  be 

178 


CHANGES    IN    THE    VALUE    OF    MONEY 

no  change  in  prices.  Goods  would  be  more  abun- 
dant, indeed ;  but,  as  Mr.  Giffen  has  remarked,  the 
"  abundance  would  make  itself  felt  in  a  rise  of 
money  wages,  salaries,  rents,  and  profits,  and  not 
in  lower  prices."  This  kind  of  appreciation  and 
depreciation  is  sometimes  spoken  of  as  absolute 
appreciation.  It  is  not  of  importance  in  the  dis- 
cussion of  changes  in  the  general  price  level,  al- 
though it  has  considerable  significance  in  relation 
to  social  welfare. 

3.  Different  Manifestations  of  Appreciation  and 
Depreciation.  —  It  is  conceivable,  moreover,  that 
the  quantity  of  gold  might  increase,  or  decrease, 
without  causing  any  change  in  prices,  and  without 
any  accompanying  change  in  the  volume  of  com- 
modities. For  the  change  in  the  quantity  of  gold 
might  be  accompanied  by  a  change,  in  the  opposite 
direction,  in  the  volume  of  other  means  of  payment, 
there  being,  of  course,  no  change  in  the  standard 
of  value.  For  example,  if  a  bank  of  issue  is  es- 
tablished in  a  community  whose  people  have  been 
making  all  their  payments  with  gold,  a  certain 
amount  of  the  gold  may  be  sent  out  of  the  place 
without  altering  prices.  The  community  gets  the 
benefit  of  a  less  expensive  means  of  payment. 
Prices  remain  the  same,  not  because  the  amount 
of  exchange  medium,  now  paper  and  gold,  is  un- 
changed, but  because  gold  is  still  easily  obtainable 
for  the  paper,  and  for  the  balance  of  exchanges 
which  do  not  offset  one  another.  It  is  urged  that 
the  familiar  use  of  the  term  "depreciation"  associates 

179 


MONEY 

it  with  an  excess  of  issue  of  money  ;  that,  therefore, 
appreciation  ought  to  imply  a  scarcity,  or  insuffi- 
ciency, of  money.  It  hardly  seems  important  to 
urge  this  view.  Appreciation  and  depreciation 
are  effects  of  excess  and  shortage  of  money,  respec- 
tively, relative  to  demand,  and  do  not  depend  upon 
the  cause  of  the  excess  or  shortage.  Excess  and 
shortage,  in  other  words,  are  relative  terms.  By 
excess  we  mean  more  than  the  demand,  and  that 
more  may  be  produced  either  by  increasing  the 
quantity  of  money  or  decreasing  the  quantity  of 
goods.  It  is  the  fact  that  there  is  more  that 
causes  depreciation.  Similarly,  we  may  reason  of 
appreciation.  The  question  whether  the  change 
in  the  price  level  is  due  to  changes  in  the  quantity 
of  money  or  in  the  quantity  of  goods  has  an  im- 
portant bearing  on  the  social  welfare,  but  none 
whatever  in  determining  the  meaning  of  the  terms 
"depreciation"  and  "appreciation." 

4.  Various  Phases  of  Appreciation.  —  Ordinarily, 
then,  we  mean  by  appreciation  a  larger  purchas- 
ing power  of  money,  or  falling  prices  of  goods, 
whether  due  to  diminution  of  the  money  supply 
or  to  an  increase  in  the  supply  of  commodities. 
In  short,  we  mean  that  a  given  quantity  of  gold 
buys  a  larger  number  of  our  composite  units  of 
goods.  This  might  happen  either  (i)  because  the 
volume  of  goods  offered  for  sale  is  the  same,  while 
the  money  supply  has  diminished,  all  other  factors 
being  unchanged;  or  (2)  because  the  volume  of 
goods  offered  has  increased,  while  the  volume  of 

1 80 


CHANGES    IN    THE    VALUE    OF    MONEY 

money  remains  the  same,  all  other  factors  being 
unchanged  ;  or  (3)  because,  although  the  volume 
of  goods  sold  and  the  quantity  of  money  are  un- 
changed, other  media  of  exchange  have  become 
less.  All  other  cases  are  variations  of  these.  Let 
us  consider  the  effect  of  each  of  these  changes 
from  the  point  of  view  of  the  community  as  a 
whole. 

According  to  the  first  supposition,  the  volume  of 
goods  offered  for  sale  is  the  same,  while  the  money 
supply  is  less,  and  all  our  other  factors,  including 
the  other  means  of  exchange,  are  unchanged.  In 
this  case  the  purchasing  power  of  gold  increases, 
its  marginal  utility  increases,  but  the  marginal  utility 
of  goods  remains  the  same,  and  the  total  social  satis- 
faction obtained  from  the  goods  remains  unchanged, 
excepting,  of  course,  so  far  as  the  change  in  the 
marginal  utility  of  gold,  in  its  use  as  a  commodity, 
affects  the  marginal  utility  of  all  commodities. 

In  the  second  case,  we  assume  that  the  volume 
of  goods  increases,  while  the  amount  of  gold  re- 
mains unchanged,  and  the  volume  of  business  done 
by  other  means  of  exchange  is  constant.  Here  the 
purchasing  power  of  gold  increases,  while  its  mar- 
ginal utility  remains  constant ;  the  marginal  utility 
of  goods  decreases,  because  of  the  increase  in  their 
supply  ;  and  the  total  satisfaction  which  the  society 
derives  from  the  consumption  of  these  goods  will, 
of  course,  increase.  From  the  standpoint  of  soci- 
ety this  change  is  an  indication  of  prosperity. 

In  the  third  case  we  assume  that  the  volume  of 
181 


MONEY 


goods  remains  the  same,  and  that  the  amount  of 
gold  is  unchanged,  while  the  volume  of  business 
done  by  other  means  of  exchange  decreases.  This 
throws  a  heavier  burden  of  exchange  work  upon 
gold,  so  that  its  purchasing  power  is  bound  to  in- 
crease. The  marginal  utility  of  gold  and  that  of 
goods  remains  the  same,  however,  because  the  sup- 
ply of  neither  changes,  and  the  total  satisfaction 
which  society  derives  from  the  consumption  of 
goods  remains  the  same  because  the  quantity  of 
goods  has  not  increased. 

We  have,  in  short,  three  classes  of  cases  in 
which  prices  fall ;  but  the  effects,  from  a  social 
standpoint,  on  the  subjective  value  of  gold  and  of 
goods,  and  on  the  total  satisfaction  which  society 
gets  from  consumption  of  the  goods,  are  different. 
We  may  tabulate  them  thus  :  — 


Case 

Volume 
of  goods 

Amount 
of  gold 

Other 
means 
of  ex- 
change 

Purch'g 
power  of 
gold 

Marg. 
util.  of 
gold 

Marg. 
util.  of 

goods 

Total 
social 
util.  of 
goods 

I 

same 

Dec. 

same 

Inc. 

Inc. 

same 

same 

2 

Inc. 

same 

same 

Inc. 

same 

Dec. 

Inc. 

3 

same 

same 

Dec. 

Inc. 

same 

same 

same 

5.  Importance  of  the  Distribution  of  the  Effects  of 
Appreciation  and  Depreciation.  —  The  standpoint 
of  the  direct  effect  on  society  as  a  whole  is  not, 
however,  a  good  one  from  which  to  view  the  change 
on  welfare  produced  by  a  fall  of  prices.  For  a 

182 


CHANGES    IN    THE    VALUE    OF    MONEY 

fall  of  prices,  of  itself,  tells  us  absolutely  nothing 
about  its  effects  on  welfare ;  it  is,  of  itself,  no  indi- 
cation either  of  prosperity  or  of  economic  loss. 
Whether  or  not  it  imports  one  or  the  other,  depends 
on  its  cause  and  on  the  distribution  of  its  effects. 
It  may  indicate  merely  a  change  in  the  productive 
power  of  a  community,  or  it  may  imply  a  rise  or 
fall  of  wages  or  incomes,  absolutely  or  per  capita, 
or  it  may  signify  the  burdening  or  oppression  of 
one  or  several  of  the  economic  classes  of  a  com- 
munity, or  possibly  the  burdening  of  the  whole 
community.  The  net  result  depends  altogether 
on  where  the  change  in  prices  strikes,  and  how  it 
works  itself  out.  If  prices  change,  say  from  100 
to  no,  it  is  obvious  that  the  purchasing  power  of 
money  has  fallen  in  the  ratio  of  110  to  100.  It 
does  not  follow,  however,  that  the  person  whose 
income  was  100  at  a  previous  date  could  buy  as 
many  commodities  and  the  same  amount  of  labor 
as  could  the  owner  of  1 10  units  of  money  at  a  later 
date.  He  could  buy  the  same  amount  of  goods 
only  if  the  prices  of  all  had  changed  in  the  same 
proportion.  But  a  fall  of  prices  does  not  take  place 
in  this  regular  way.  Prices  of  articles  change  in 
different  proportions,  and  the  effects  of  the  fall 
will  be  different  according  to  the  changes  produced 
in  wages,  incomes,  cost  of  production  of  goods,  and 
population. 

To  begin  with,  a  fall  of  prices  may  conceivably 
take  place  while  relative  wages  and  incomes  remain 
as  they  were  before,  the  only  change  being  in  the 

183   " 


MONEY 

quantity  of  money.  If  the  producing  capacity  of 
society,  the  cost  of  production  of  goods,  and  popu- 
lation remain  unchanged,  the  fall  of  prices  produced 
by  a  lessening  of  the  quantity  of  money  would  have 
no  other  effect  on  the  economic  sharers  of  the  prod- 
uct of  industry  than  to  make  necessary  the  use  of 
a  new  scale  of  prices.  It  could  occur,  conceivably, 
without  affecting  either  the  welfare  of  society  as  a 
whole,  or  the  relative  welfare  of  its  different  groups. 
Practically,  however,  such  a  proportionate  distribu- 
tion of  the  effects  is  impossible.  The  blow  would 
fall  on  different  classes,  not  at  the  same  moment 
and  in  the  same  degree,  but  in  time  and  degree 
dependent  on  the  relative  economic  strength  of  the 
classes. 

6.  Different  Effects  of  Appreciation  under  Dif- 
ferent Conditions.  —  If  the  supply  of  goods  in- 
creases, owing  to  the  extension  of  production  under 
the  influence  of  improvements,  while  the  money 
demand  for  them  is  the  same,  all  other  conditions 
remaining  the  same,  prices  will  fall.  Money 
wages  and  incomes  being  unchanged,  the  fall  is  a 
sign  and  measure  of  the  greater  producing  capacity 
of  society,  and  implies  enlarged  consumption  for 
all  classes.  In  this  case  the  community  is  just  as 
well  off  as  if  the  volume  of  money  had  increased 
sufficiently  to  prevent  the  fall  of  prices.  Indeed, 
it  is  better  off,  because  it  has  saved  the  investment 
of  capital  and  labor  necessary  to  produce  the  addi- 
tional money.  It  will  continue  to  be  better  off  with 
a  falling  price  level,  under  the  conditions  named, 

184 


CHANGES    IN    THE    VALUE    OF    MONEY 

until  the  fall  is  great  enough  to  offset  the  gain 
from  the  lowered  cost  of  production  of  goods.  If 
the  falling  cost  of  production  be  due  to  an  increase 
in  the  efficiency  of  labor,  the  real  price  of  labor 
will  rise,  as  compared  with  that  of  goods.  But  as 
the  money  demand  for  goods  is  the  same,  their 
price  must  fall  in  order  to  afford  labor  a  higher 
real  return.  The  fall  in  prices  under  these  circum- 
stances is  merely  the  evidence  of  the  increased 
productivity,  and  consequent  higher  real  wages  of 
labor.  Producers  and  capitalists  lose  nothing. 
These  results  will  follow,  even  if  the  only  goods 
which  fall  in  price  are  the  goods  consumed  by 
laborers,  and  constituting  their  real  wages  ;  for 
their  fall  will  lower  the  general  price  level,  but  the 
change  will  imply  no  loss  to  any  class  in  society. 

Again,  a  fall  of  prices  may  be  accompanied  with 
rising  money  wages  and  profits,  if  the  fall  be  caused 
by  decreased  cost  of  production,  population  and 
other  conditions  being  unchanged,  provided  the 
fall  of  prices  be  less  rapid  than  the  decrease  of  cost. 
The  fall  here  is  a  sign  of  the  increasing  produc- 
ing capacity  of  society  and  of  increased  labor  effi- 
ciency. If,  however,  prices  fall  more  rapidly  than 
cost,  owing,  for  example,  to  decreased  demand 
caused  by  a  depression,  both  laborers  and  entre- 
preneurs will  lose. 

7.  The  Effect  of  Appreciation  transmitted  from 
Class  to  Class.  —  In  each  of  these  illustrative  cases 
of  falling  prices,  we  have  assumed  that,  with 
changes  in  some  of  the  conditions  of  price  equi- 

'85 


MONEY 

librium,  other  conditions  have  remained  the  same. 
As  a  matter  of  fact,  a  change  in  one  condition  in- 
duces changes  in  the  other  conditions  which  de- 
termine the  price  level.  If  the  quantity  of  money 
becomes  less,  prices  fall,  and  other  things  cannot 
remain  unchanged.  Those  on  whom  the  burden 
of  falling  prices  falls  first,  will  naturally  try  to 
shift  it.  When  prices  fall,  the  advantage,  what- 
ever it  is,  accrues  first  to  money  owners  at  the 
expense,  primarily,  of  producers.  The  owners  of 
money,  however,  are  not  allowed  long  to  keep  their 
advantage,  for  the  producers,  finding  their  profits 
curtailed,  diminish  production  in  order  to  raise 
prices ;  or  else  they  force  down  the  rate  of  wages, 
or  in  some  other  way  try  to  recoup  themselves  for 
their  loss  of  profits.  Now,  if  production  be  cur- 
tailed, part  of  the  loss  felt  by  producers  is  passed 
on  to  wage-earners  and  consumers.  The  laboring 
class  will  by  and  by  receive  less  in  total  money 
wages  and,  unless  the  population  falls  away,  in 
per  capita  wages  also ;  while,  as  consumers,  they 
will  pay  higher  prices.  Other  consumers  in  the 
community  will  feel  the  change  by  having  to  pay 
higher  prices  for  goods. 

If  the  fall  of  prices  resulted  in  reducing  wages, 
the  laboring  class  would  for  a  time  suffer  most,  or 
all,  of  the  loss.  In  time,  however,  their  diminished 
consumption  would  cause  a  diminution  of  produc- 
tion and  a  rise  of  prices,  and  other  consumers 
would  share  the  loss.  In  a  stationary  society,  in 
which  producing  capacity,  cost  of  production,  and 

186 


CHANGES    IN    THE    VALUE    OF    MONEY 

population  remain  the  same  from  period  to  period, 
the  final  result  of  a  fall  of  prices  would  be  a  dis- 
tribution of  the  burden  among  the  economic  sharers 
of  the  product,  with  more  or  less  equity.  It  might 
seem  that  if  this  could  be  done,  the  change  of  price 
level  would  be  devoid  of  significance  for  the  indus- 
trial welfare  of  the  community.  The  psychological 
effect  of  this  change,  however,  cannot  be  neglected, 
even  if  the  economic  relations  of  the  different 
classes  be  unchanged ;  for  a  lower  range  of  in- 
comes, prices,  and  wages  accustom  people  to  small 
things  and  lower  standards,  and  the  habit  of  look- 
ing at  things  in  a  small  way  deadens  enterprise, 
and  is  likely  to  act  against  a  recovery  from  the 
conditions  which  produced  it. 

8.  The  Normal  Case  of  Falling  Prices.  — The 
normal  case  of  falling  prices  for  a  long  period  is 
that  of  a  progressive  community  whose  producing 
capacity  is  on  the  increase  at  a  diminishing  cost  of 
production,  and  with  a  growing  population.  Money 
wages  and  incomes  do  not  fall  and  may  even  rise, 
and  the  fall  of  the  price  level  would  import  pros- 
perity to  the  community.  It  would  mean  that  the 
advantages  of  decreasing  cost  of  production  and 
growing  producing  capacity  are  distributed  among 
the  different  classes  in  society.  The  distribution 
would  be  gradual,  however.  Some  one  group  or 
class  at  first  would  get  more  than  its  share  of  the 
advantage,  as  is  the  case  in  all  economic  changes, 
whether  in  the  direction  of  economic  improvement 
or  deterioration.  The  entrepreneur  would  gain  first 

187 


MONEY 

from  diminished  cost,  then  the  capitalist,  then  the 
consumer  as  such,  and  finally  the  wage-earner.  For 
a  lessened  cost  of  production  brings  unusual  profit 
to  the  entrepreneur  and  stimulates  enterprise  until 
the  unusual  margin  of  profits  tends  to  disappear. 
The  stimulation  of  enterprise  causes  an  increased 
demand  for  capital  and  forces  up  the  rate  of  inter- 
est ;  and  the  competition  of  producers  to  sell  their 
goods  tends  to  lower  prices  and  to  give  consumers 
an  advantage,  while  at  the  same  time  their  desire 
to  extend  their  business  leads  them  to  offer  higher 
wages.  Under  these  conditions  the  community  at 
first  endeavors  to  do  the  extra  work  of  distributing 
a  larger  volume  of  goods  with  the  same  means  of 
exchange,  because  for  a  time  there  is  a  larger  net 
gain  in  straining  the  existing  means  of  exchange 
to  do  the  additional  work,  than  in  sinking  more 
capital  to  increase  the  volume  of  money.  This 
condition  will  continue  until  the  net  gain  disappears 
and  society  finds  it  more  profitable  to  increase  the 
volume  of  money.  This  is  doubtless  the  explana- 
tion of  the  relative  decrease  in  gold  in  such  a 
period  as  the  twenty-five  years  following  1873. 
Throughout  all  this  period,  despite  crises  and  oc- 
casional apparent  retrogression,  the  population  of 
the  industrial  countries  of  the  world  increased,  to- 
gether with  their  producing  capacity ;  while  inven- 
tion, discoveries,  the  adoption  of  better  business 
organization,  and  the  utilization  of  new  and  more 
fertile  land,  all  tended  to  force  down  the  cost  of 
production  of  commodities.  The  profit  from  in- 

188 


CHANGES    IN    THE    VALUE    OF    MONEY 

vesting  in  the  production  of  other  kinds  of  com- 
modities than  gold  was  greater  than  could  be  had, 
under  existing  physical  and  economic  conditions  of 
its  production,  from  investments  in  producing  gold. 
Under  the  conditions  above  described,  prices 
will  continue  to  fall,  until  the  fall  wipes  out  the 
differential  gain  from  other  investments  to  a  suf- 
ficient degree  to  make  it  profitable  to  extend 
investments  in  the  production  of  the  money  com- 
modity; or  else  men  will  be  stimulated  to  the 
discovery  of  a  cheaper  process  of  production  of 
the  money  commodity,  in  order  to  secure  from 
investments  in  this  direction  as  large  returns  as 
from  the  production  of  other  kinds  of  goods. 
This  is  what  has  happened  in  recent  years. 
The  production  of  gold  fell  away,  not  because 
of  the  physical  exhaustion  of  gold,  but  because, 
under  the  old  conditions,  its  cost  of  production 
was  so  high  as  to  make  the  margin  of  profit  from 
investing  in  its  production  less  than  could  be 
obtained  in  other  ways.  New  processes  of  reduc- 
tion of  the  ore,  however,  lowered  the  cost  of  pro- 
duction, so  that  the  margin  of  profit  from  producing 
the  standard  money  commodity  became  greater. 
Since  then  its  output  has  increased.  Whether  or 
not  the  increase  in  the  output  has  been  the  chief 
cause  of  a  higher  price  level  is  at  least  open  to 
dispute.  The  effect  of  the  increased  output 
might,  under  proper  conditions,  manifest  itself  in 
this  way,  and  after  a  time  its  lower  value  would 
again  lessen  the  production.  Under  the  conditions 

189 


MONEY 

that  prevail  now,  however,  it  is  likely  that  the  net 
result  has  been  further  to  stimulate  the  produc- 
tion  of  other  goods,  and  to  extend  the  credit 
machinery,  so  that  the  increased  output  is  profit- 
able on  the  rising  scale  of  prices. 

9.  The  Effects  of  Appreciation  on  Debtors  and 
Creditors.  —  In  our  discussion  thus  far,  we  have 
considered  the  effects  of  a  changing  price  level 
on  the  sharers  of  the  product,  in  the  economic 
sense  of  the  word  "  sharers."  That  is,  we  have  in- 
quired into  the  effects  of  the  appreciation  of  gold 
on  the  entrepreneur,  the  capitalist,  and  the  wage- 
earner.  Another  line  of  economic  cleavage  gives 
us,  however,  a  different  classification.  We  may 
divide  the  people  most  affected  by  the  change  in 
price  level  into  creditor  and  debtor  classes.  It  is 
important  to  determine  how  the  debtor  class  as 
such  is  affected  by  the  appreciation  of  money.  It 
is  commonly  understood,  of  course,  that  such  a 
change  is  always  detrimental  to  them,  and  bene- 
ficial to  the  creditors.  The  question  is  an  impor- 
tant one,  because,  nowadays,  production  is  carried 
on  so  largely  on  borrowed  capital,  and  the  whole 
producing  class  is  properly  regarded  as  a  debtor 
class.  It  is  clear,  from  what  has  been  said,  that 
in  all  cases  of  appreciation  of  gold,  or  falling 
prices,  in  which  the  cost  of  production  of  goods 
does  not  decrease,  and  money  wages  and  money 
interest  do  not  fall,  the  debtor  producers  must 
lose,  and  their  creditors  must  gain  correspondingly. 
Now,  in  a  normal  case,  in  a  progressive  society, 

190 


CHANGES    IN    THE    VALUE    OF    MONEY 

the  fall  of  prices  is  accompanied  by  a  decreased 
cost,  and  the  debtor  producers  lose  less  the  more 
nearly  the  cost  of  production  and  the  price  level 
fall  in  the  same  degree.  It  is  supposable,  indeed, 
that  they  may  even  gain,  but  this  is  so  highly  un- 
likely as  not  to  be  worth  discussing.  As  a  rule, 
the  debtor  loses  under  appreciation,  whatever  may 
be  its  cause,  and  the  effect  on  the  welfare  of  some 
social  classes  may  be  serious,  or  even  disastrous. 
Much  depends,  of  course,  upon  the  period  of  the 
debt.  The  longer  the  period,  the  greater  is  the 
burden  likely  to  be.  The  distribution  of  the  in- 
come of  society  is  changed,  then,  by  the  apprecia- 
tion of  money.  In  the  case  mentioned  at  the 
beginning  of  the  chapter,  in  which  increased  pro- 
duction of  goods  is  accompanied  with  proportion- 
ate increase  of  the  amount  of  money,  so  that  the 
price  level  does  not  change,  the  advantage  of  the 
increased  production  is  distributed  throughout 
the  community,  and  the  social  welfare  increases. 
This  is  not  the  case,  however,  when  the  increase  of 
production  is  not  accompanied  with  a  due  increase 
of  gold.  The  welfare  of  society  as  a  whole  may 
be  improved,  but  only  at  the  expense,  in  part,  of 
some  classes. 

10.  Comparative  Disadvantages  of  Appreciation 
and  Depreciation.  —  There  has  been  a  good  deal  of 
discussion  of  the  question  whether  appreciation  or 
depreciation  is  more  advantageous  to  society.  The 
usual  opinion  is  that  contraction  and  falling  prices 
are  a  greater  evil  than  is  appreciation  of  money, 

191 


MONEY 

because,  it  is  supposed,  the  gradual  appreciation 
of  money  in  terms  of  commodities  stimulates  pro- 
duction and  expands  industry.  It  is  urged  that 
the  prospect  of  rising  prices  constantly  urges  the 
entrepreneur  to  increase  his  product,  in  order  to 
anticipate  further  increases.  This  statement,  how- 
ever, cannot  be  made  as  a  general  truth ;  for,  in 
the  first  place,  if  the  cost  of  production  falls  faster 
than  prices  do,  the  producer  will  gain  just  as  truly 
as  he  will  if  prices  are  slightly  raising.  It  is  a 
matter  of  indifference  to  him  what  the  cause  of 
his  larger  profits  is  —  whether  they  are  due  simply 
to  a  rising  price,  or  to  a  cost  decreasing  faster  than 
a  slowly  falling  price.  In  the  second  place,  the 
result  to  the  producer  depends  partly  on  the  way 
in  which  the  change  takes  place.  If  the  fall  of 
prices  occurs  for  all  industries  at  the  same  time, 
and  in  the  same  degree,  then  it  would  be  true  that 
depreciation  would  be  more  beneficial  to  the  pro- 
ducer than  would  its  opposite.  This  simultaneous 
and  proportionate  fall  of  prices,  however,  is  not 
usual.  Indeed,  it  may  be  doubted  whether  it  ever 
can  occur.  A  change  in  the  purchasing  power 
of  money  in  terms  of  goods  shows  itself  in  a  fall 
of  the  prices  of  some  articles  sooner  than  it  does 
in  those  of  others.  The  consequence  is  to  lessen  the 
expenses  of  production  of  all  producers  who  use 
these  articles  in  their  business,  so  that  each  pro- 
ducer makes  a  gain,  until  the  price  of  the  articles 
which  he  himself  makes  also  falls  to  the  same 
degree  as  his  cost  of  production  has  been  dimin- 

192 


CHANGES    IN    THE    VALUE    OF    MONEY 

ished.  Moreover,  it  is  questionable  whether  any 
gain  which  the  producers  make  from  the  gradual 
depreciation  of  money  in  terms  of  commodities 
yields  any  gain  to  society  unless  money  wages  and 
incomes  increase  in  such  a  way  as  to  distribute  the 
benefit  among  the  various  producing  classes. 

11.  Causes  of  Appreciation  and  Depreciation.  — 
The  causes  of  changes  in  the  purchasing  power 
of  money  in  terms  of  goods  are  very  numerous, 
and  the  movement  of  changing  prices  may  begin 
at  different  points  in  the  economic  scale.  They 
may  be  due,  in  the  first  place,  to  changes  in  the 
physical  conditions  of  production  of  the  exchange 
medium.  Much  has  been  said  in  the  past  twenty 
years  about  the  exhaustion  of  the  gold  mines. 
Of  course,  the  truth  about  the  matter  is,  that 
under  the  economic  conditions  of  mining  which 
prevailed,  it  did  not  pay  as  well  to  invest  capital 
in  producing  more  gold  as  it  did  to  invest  capital 
in  producing  something  else.  There  really  has 
never  been  any  reasonable  ground  for  the  belief 
that  the  supply  of  gold  was  near  exhaustion.  The 
output  of  gold,  or  the  amount  of  gold  which  it  is 
profitable  to  produce,  depends  more  on  economic 
considerations  than  on  physical  conditions.  That 
this  is  the  case  is  well  shown  by  the  recent  change 
in  the  gold-mining  industry.  The  exhaustion  of 
placer  deposits,  and  the  consequent  unprofitable- 
ness of  gold  production,  stimulated  invention  and 
discovery,  so  that,  by  new  processes  of  extraction 
and  refinement,  the  cost  of  production  of  the  pre- 
o  193 


MONEY 

cious  metals  has  been  very  much  reduced,  and  the 
profitableness  of  investment  in  their  production 
correspondingly  increased. 

A  second  cause  of  change  in  the  purchasing 
power  of  gold  is  found  in  changing  economic 
conditions.  As  has  been  repeatedly  pointed  out, 
under  some  conditions  there  is  more  profit  in  other 
lines  of  investment.  Moreover,  the  capitalistic 
production  of  gold  now  is  greater  than  the  ac- 
cidental production,  although  the  opposite  was 
formerly  the  case.  That  is  to  say,  gold  was 
obtained  as  a  result  of  accidental  discovery,  by 
prospective  miners  who  had  no  capital,  while  now 
gold  mining  has  become  a  more  or  less  regu- 
lar industry,  with  large  investment  of  capital. 
Like  other  industries,  it  has  its  periods  of  de- 
pression or  comparative  unprofitableness ;  and  if 
these  continue  long  enough,  the  capital  invested 
in  gold  mining  is  gradually  withdrawn,  or,  at  any 
rate,  is  not  increased. 

A  second  economic  change  which  influences  the 
price  level  is  an  extension  of  the  use  of  gold,  either 
by  the  demonetization  of  other  things  used  previ- 
ously as  money,  so  throwing  a  heavier  demand  on 
gold,  or  by  an  extension  of  the  gold  standard  to  a 
new  country.  For  example,  it  is  a  common  belief 
that  the  demonetization  of  silver  by  Germany  con- 
tributed not  a  little  to  the  rise  in  the  price  of  gold. 
While  undoubtedly  too  much  emphasis  has  been 
placed  upon  this  historical  event,  it  is  doubtless 
true  that  the  influence,  so  far  as  it  went,  was  in 

194 


the  direction  indicated.  Of  course,  the  adoption 
of  the  gold  standard  by  countries  which  previously 
used  silver,  raises  the  price  of  gold  only  as  the 
actual  use  of  gold  is  increased  thereby. 

A  third  economic  change  affecting  the  price 
level  is  the  resumption  of  specie  payments  by 
countries  which,  for  a  considerable  time,  have 
been  on  a  depreciated  paper  basis.  This  was 
the  case  in  the  United  States  in  1879,  and  in  the 
empire  of  Austria-Hungary  in  1892.  In  such 
cases  a  fund  of  gold  is  usually  accumulated, 
even  if  it  is  not  brought  into  general  circulation. 

A  third  group  of  causes  affecting  the  price  of 
gold  is  found  in  political  and  social  changes,  as 
distinct  from  economic.  War,  for  instance,  may 
cause  a  cessation  of  the  production  of  gold,  as  was 
the  case  during  1899-1902,  the  years  of  the  Boer 
War  in  South  Africa.  Between  1898  and  1900 
the  gold  production  of  Africa  fell  from  120,566 
kilograms  to  13,048.  Aside,  however,  from  the 
direct  influence  on  gold  production  by  war,  the 
disturbance  of  industry  which  it  causes  may  affect 
general  prices.  Production  is  likely  to  be  changed 
in  a  measure  from  its  ordinary  channels,  and  a 
large  amount  of  goods  is  unproductively  consumed. 

A  social  change  which  leads  to  a  larger  use  of 
gold  in  the  arts  also  has  an  effect  on  the  price 
level,  unless  the  production  of  gold  is  changing 
fast  enough  to  offset  the  change  in  this  demand. 
If  fashion,  for  example,  calls  for  more  general  use 
of  gold  for  ornaments,  or  for  artistic  purposes,  the 

195 


MONEY 

result  is  to  raise  the  marginal  utility  of  the  money 
commodity,  and  very  likely,  too,  its  purchasing 
power. 

A  change  in  the  purchasing  power  may  be 
caused  by  legislation  which  seeks  to  foster  the 
private  interests  of  the  owners  of  gold  and  silver 
mines.  The  Bland  and,  later,  the  Allison  law  in 
the  United  States,  each  of  which  provided  for 
the  purchase  of  a  certain  amount  of  silver  by  the 
United  States  government,  are  instances  of  this 
kind.  The  avowed  purpose,  and  for  a  time  the 
actual  result,  was  to  raise  the  price  of  silver; 
although,  of  course,  later,  the  higher  price  stimu- 
lated production,  and  resulted  in  a  renewed  fall. 
Although  silver  was  not  then  the  monetary  stand- 
ard in  the  United  States,  the  result  of  silver 
legislation  was  to  cause  a  great  increase  in  the 
amount  of  silver  in  circulation  as  money,  so  that 
for  some  years  there  was  a  heavy  export  of  gold 
in  excess  of  our  production,  and  an  impairment  of 
business  confidence  which  led  to  depreciation  and 
falling  prices. 

12.  Effect  of  Changes  in  Production  on  the  Value 
of  Money.  —  On  the  other  side  of  the  shield  must 
be  mentioned  economic  changes  in  the  supply  of 
goods.  Technical  improvements  in  production, 
which  reduce  the  cost  and  increase  the  output, 
will,  other  influences  remaining  the  same,  cause 
an  appreciation  of  gold.  So,  too,  may  prolonged 
strikes,  and  a  rise  in  money  wages  and  incomes. 

Closely  allied  with  changes  which  come  from 
196 


CHANGES    IN    THE    VALUE    OF    MONEY 

technical  improvements  is  the  growth  of  industry 
and  commerce  due  to  the  opening  of  new  countries 
or  undeveloped  markets.  New  sources  of  raw  ma- 
terials, and  the  opening  up  of  cheaper  routes 
of  transportation,  have  effects  similar  in  character 
to  technical  improvements  in  production.  Some 
authorities,  like  Mr.  Sauerbeck,  emphasize,  for  ex- 
ample, the  opening  of  the  Suez  Canal  as  an  im- 
portant factor  in  the  fall  of  prices  during  the 
twenty-five  years  following  1873.  Undoubtedly, 
the  development  of  the  railway  systems  of  the 
United  States,  and  the  consequent  opening  up  of 
new  and  more  fertile  lands,  has  been  for  many 
years  an  important  factor  in  the  falling  prices  of 
grain. 

The  extension  or  contraction  of  credit,  moreover, 
irrespective  of  changes  in  the  supply  of  money 
commodity,  will  have  an  effect  precisely  similar  in 
character.  The  effect  of  a  general  extension  of 
banking  is  to  lessen  the  demand  for  gold  for 
actual  payments,  and  for  a  time,  therefore,  to  make 
the  supply  greater  than  the  existing  demand  at  the 
old  ratio  of  exchange.  A  temporary  contraction 
of  credit,  from  industrial  and  commercial  depres- 
sion, will,  for  a  time,  cause  a  greater  demand  for 
gold  in  order  to  make  payments,  because  the  credit 
part  of  the  exchange  medium  is  less,  and  so  will 
produce  a  fall  of  prices. 

Different  in  character  from  any  of  the  cases 
which  have  thus  far  been  mentioned  as  affecting 
the  purchasing  power  of  gold,  is  that  attributed 
197 


MONEY 

to  the  effect  of  the  fall  of  the  gold  price  of  silver 
on  the  gold  price  of  goods.  It  is  urged  that  since 
some  countries  with  large  export  trade  use  silver, 
if  silver  falls  in  terms  of  gold,  while  the  prices  of 
other  things  in  silver  countries  remain  steady,  then 
the  gold  prices  of  other  articles  of  export  will  fall. 
Undoubtedly  this  may  happen  for  a  while,  but 
such  an  effect  can  hardly  be  either  general  or 
permanent. 


198 


CHAPTER   XI 

CREDIT   AND   PRICES 

REFERENCES  :  Colwell,  Stephen,  The  Ways  and  Means  of  Pay- 
ment, Ch.  7  ;  Hadley,  A.  T.,  Economics,  Ch.  8,  §  274 ;  Jevons, 
W.  S. ,  Money  and  the  Mechanism  of  Exchange,  Ch.  26  ;  Knies,  K., 
Der  Credit,  Ch.  6  ;  Laughlin,  J.  L.,  Principles  of  Money,  Ch.  4,  §  8  ; 
Macleod,  H.  D.,  Theory  of  Credit,  Vol.  II.,  Pt.  I.,  Ch.  12;  Ibid, 
Report  of  the  Royal  Commission  on  Gold  and  Silver,  1888,  pp.  234, 
245  ;  Mill,  J.  S.,  Principles  of  Political  Economy,  Vol.  II.,  Bk.  III., 
Ch.  12  ;  Nicholson,  J.  S.,  Money  and  Monetary  Problems,  Pt.  I., 
Ch.  6  ;  Philippovich,  E.  von,  Grundriss  der  Politischen  Oekonomie, 
4te  Aufl.,  Erster  Band,  §  109  ;  Willis,  H.  P.,  Credit  Devices  and 
the  Quantity  Theory,  Journ.  Pol.  Econ.,  Vol.  IV.,  p.  281. 

1.  Meaning  of  Credit.  —  By  credit  we  mean  the 
power  which  one  person  has  to  induce  another  to 
put  economic  goods  at  his  disposal  for  a  time,  on 
promise  of  future  payment.  Credit  is  thus  an  at- 
tribute, or  power,  of  the  borrower.  There  can  be 
no  transfer  of  goods  from  one  person  to  another 
for  future  payment  unless  that  other  has  some 
power  or  influence  that  induces  the  transfer.  This 
power  is  not  merely  a  desire  to  borrow.  To  be  of 
avail  in  the  market,  to  become  an  economic  force, 
the  desire  must  be,  like  the  demand,  effective. 
Credit,  or  borrowing  power,  is  usually,  if  not  al- 
ways, expressed  in  terms  of  money.  This  custom, 
however,  does  not  imply  that  money  loans,  or 

199 


MONEY 

deferred  money  payments,  are  the  only  kind  of 
credit  transactions.  Indeed,  as  a  rule,  it  is  not 
money  that  is  borrowed  at  all,  but  goods,  or  a 
credit  of  wider  circulation  than  the  credit  of  the 
borrower.  If  a  person  buys  goods  from  a  mer- 
chant on  a  promise  of  future  payment,  his  credit 
demand  is  simply  a  demand  for  goods  additional 
to  the  direct  money  demand,  and  not  a  demand  for 
money.  Or,  the  credit  of  an  individual  may  be 
exchanged  for  that  of  a  bank,  because  the  credit 
of  the  bank  is  more  widely  accepted.  In  the  last 
analysis  this  latter  credit  demand  is  also  a  demand 
for  goods.  But  whether  the  credit  exchange  be 
one  or  the  other  of  these  two  kinds,  it  appears  as 
a  claim  to  money. 

Credit  is  to  be  distinguished  from  mere  confi- 
dence, although  confidence  is  an  important  element 
of  credit.  Indeed,  the  essence  of  credit  is  con- 
fidence on  the  part  of  the  creditor  in  the  bor- 
rower's power  and  willingness  to  pay  the  debt. 
That  confidence  may  arise  from  the  creditor's 
belief  in  the  integrity  of  the  borrower,  or  from 
the  offering  by  the  debtor  of  sufficient  property 
as  security.  Both  forms,  personal  and  secured,  or 
real  credit,  are  very  commonly  employed.  Secured 
credit,  so  far  as  concerns  bank  loans,  is  most  com- 
monly employed  in  call,  or  demand,  loans ;  while 
loans  on  time,  which  are  usually  discounts  of  mer- 
cantile paper,  are  more  generally  unsecured  by 
a  deposit  of  collateral.  For  example,  the  total 
loans  of  the  national  banks  of  the  United  States 
200 


CREDIT    AND    PRICES 

on  September  9,  1903,  were  $3,481,446,722.  Of 
this  aggregate,  demand  loans  to  the  amount  of 
$717,258,621,  and  time  loans  to  the  amount  of 
$655,439,130,  or  a  total  of  $1,372.697.751,  were 
secured  by  the  deposit  of  stocks,  bonds,  and 
other  collateral.  On  the  other  hand,  loans  to 
the  amount  of  $2,108,749,021  were  unsecured. 
Of  the  unsecured  loans,  $283,108,946  were  call, 
or  demand,  loans,  while  the  balance  was  time 
loans. 

2.  Nature  of  Credit  Transactions.  —  Credit,  or 
the  power  of  borrowing,  manifests  itself  in  credit 
transactions.  It  is  the  credit  transaction  which  is 
evident,  which  pushes  itself  upon  our  attention 
and  attracts  our  notice.  A  credit  transaction  is 
one  kind  of  exchange.  It  is  a  present  transfer  of 
economic  goods  or  services,  or  property,  in  con- 
sideration of  a  promise  of  a  future  return  of  equiv- 
alent value.  The  transfer  may  be  physical  or 
merely  legal ;  that  is,  it  may  consist  in  the  transfer 
of  an  actual  thing,  or  in  the  transfer  of  the  title  to 
a  thing.  The  essential  features  of  a  credit  trans- 
action are  these :  goods  are  given  up  by  the 
creditor  to  the  debtor ;  the  creditor  must  have 
confidence  that  he  will  be  paid ;  his  action  is  vol- 
untary ;  payment  is  expected  after  a  definite 
period ;  the  thing  transferred  is  economic  goods, 
or  titles  thereto ;  the  debtor  receives  a  legal  prop- 
erty in  these,  and  the  creditor  receives  in  exchange 
a  corresponding  legal  property  in  the  shape  of  a 
title  to  future  goods. 

2OI 


MONEY 

3.  Credit  Documents.  —  Out  of   credit  transac- 
tions arise  various  kinds  of  credit  paper,  or  instru- 
ments.    The  most  common  of  these   are  bills   of 
exchange,   promissory   notes,   checks,   and   drafts. 
These  differ  in  the  matter  of  their  origin,   as  to 
whether  created  by  debtor  or  creditor;    in  their 
power  of  circulation,  and  in  certain  details  of  form  ; 
but  all  are  evidences  of  a  debt  on  the  one  hand, 
and  of  a  credit  on  the  other,  and  all  purport  to  be 
claims  for  money.     Nevertheless,  in  the  last  analy- 
sis, all  but  the  bank  drafts  are  based  upon  goods 
rather  than   upon  money.     Each   piece  of    credit 
paper  represents  the  purchase,  or  sale,  of  a  certain 
amount    of   goods,   whose   value   is    expressed   in 
terms   of   money  on  the   face  of    the  instrument. 
Credit  instruments,  therefore,  are  simply  a  means 
of    facilitating   the  exchange    of  goods,    and    the 
obligations  created  by  these  credit  instruments  are 
met,  in  the  main,  by  the  cancellation,  or  offsetting, 
of  the  instruments  against  each  other. 

4.  Difficulty  of  determining  the  Effect  of  Credit 
on  Prices. — Perhaps  the  most  important  question 
in  the  theory  of  credit  is  the  effect  of  credit  trans- 
actions upon  the  price  level.     We  may  approach 
the  subject  from   either  one   of  two  points.     We 
may  regard  credit  purchases  as  additions  to  the 
demand  for  goods,  and  trace  the  effect  of  the  in- 
creased demand   for    commodities  on   prices ;    or, 
we    may  take  into   consideration  the  increase   in 
the    supply  of   the   medium   of    exchange,  in   the 
shape  of  credit  paper,  and  trace  the  effects  of  this 

202 


CREDIT    AND     PRICES 

increased  supply  upon  the  level  of  prices.  On 
the  whole,  it  is  simpler  to  take  the  former 
course. 

We  must  distinguish  the  influence  of  credit  upon 
relative  prices  from  the  part  played  by  credit  as 
one  of  the  determinants  of  the  price  level.  An 
increased  demand  for  particular  goods,  due  to 
credit  purchases,  will,  of  course,  raise  their  prices. 
The  tradesman  feels  that  he  must  be  insured 
against  possible  loss  through  bad  debts,  and  must 
be  remunerated  for  lying  out  of  the  use  of  his 
capital.  How  much  insurance  and  how  much 
remuneration  depends  on  the  length  of  the  credit 
period,  on  the  ordinary  rate  of  interest,  on  the  ra- 
pidity with  which  the  merchant  ordinarily  turns 
over  his  capital,  and  on  the  estimated  risk  of  loss. 
We  are  not  concerned  here,  however,  with  changes 
in  relative  prices,  which  are  caused  partly  by  differ- 
ences in  the  amount  of  credit  demand  for  different 
classes  of  goods. 

5.  Different  Theories  of  the  Relation  of  Credit  to 
Prices.  —  There  are  several  possible  views  of  the 
character  of  the  influence  exerted  by  credit  on  the 
price  level.  In  the  first  place,  the  view  may  be 
taken  that  credit  usually,  or  normally,  has  no  effect 
on  prices.  This  view  is  based  upon  the  supposi- 
tion that  credit  demand,  taken  as  a  whole,  cancels 
itself;  that  the  credit  demand  has  existed  from 
the  beginning  of  exchange,  side  by  side  with 
money  demand,  and  that  therefore  it  is  not  perti- 
nent to  say  that  credit  has  any  influence  on 
203 


MONEY 

prices.1  At  first  sight  this  theory  seems  plausible. 
But  if  credit  has  no  influence  on  prices  because  it  is 
coexistent  with  the  level  of  prices,  similarly  money 
can  have  no  influence  on  prices.  If  it  is  reason- 
ing in  a  circle  to  say  that  we  do  not  have  a  price 
level  without  credit,  and  that  credit  is  therefore 
not  a  determinant  of  the  price  level,  the  same 
remark  is  equally  true  of  money.  In  order  to 
determine  the  influence  of  one  of  the  factors  of 
the  price  level,  we  must  do  our  best  to  find  out 
what  would  be  the  state  of  affairs  in  the  absence 
of  that  particular  factor.  It  is  not  enough  to  say 
that  this  factor  is  always  present,  and,  therefore,  we 
need  not  try  to  decide  what  would  be  the  situa- 
tion if  it  were  absent.  If  it  is  present,  it  must 
have  some  effect. 

In  the  next  place,  the  view  is  sometimes  taken 
that  an  increased  demand  for  goods  due  to  credit 
is  precisely  similar  in  its  effect  to  an  increased 
demand  due  to  money.  Here  emphasis  is  laid 
on  the  fact  that  there  is  an  increase  in  demand, 
and  the  fact  is  overlooked  that  the  increase  in  de- 
mand in  a  measure  automatically  cancels  itself  by 
a  simultaneous  increase  of  the  supply  of  goods,  so 
that  the  total  credit  demand  does  not  play  directly 
on  prices.  Hence  it  is  not  correct  to  say2  that  the 
price  level  is  influenced  by  the  whole  mass  of  credit 

1  This  seems  to  be  Professor  Laughlin's  view.     See  his  "  Prin- 
ciples of  Money." 

2  Cf.  Macleod,  Report  Royal  Commission  on  Gold  and  Silver, 
1888,  pp.  234  and  245. 

204 


CREDIT    AND    PRICES 

instruments  created.  It  is  not  true  that  the  prices 
of  commodities  are  determined  directly  by  the 
total  amount  of  all  the  different  kinds  of  circulat- 
ing medium,  rather  than  by  the  demand  for,  and 
supply  of,  standard  money,  under  given  conditions 
of  the  exchange  mechanism.  Nor  is  it  quite  cor- 
rect to  say,  with  Walker,  that  the  general  level  of 
prices  is  determined  by  the  amount  of,  and  demand 
for,  the  standard  medium  of  exchange ;  that  on  the 
level  of  prices  thus  fixed  credit  transactions  occur, 
which  cancel  one  another  without  the  use  of 
money ;  and  that  the  credit  instruments  on  which 
these  transactions  are  based  disappear  when  the 
transactions  are  closed,  without  exercising  any  in- 
fluence on  the  level  of  prices.  The  uncancelled 
balance  of  indebtedness  based  on  credit  does,  in- 
deed, create  a  demand  for  money  and  will  have  a 
certain  influence  on  the  price  level ;  but  the  whole 
amount  of  this  unsettled  balance,  or  the  credit  in- 
struments which  represent  it,  does  not,  as  a  matter 
of  fact,  enter  in,  like  so  much  standard  money,  to 
influence  prices. 

6.  Credit  One  of  the  Determinants  of  the  Price 
Level.  —  According  to  the  theory  advanced  in  this 
book,  every  community  has  a  choice  of  methods  of 
exchange  and  means  of  payment,  including  direct 
barter,  money  exchange,  and  cancellation,  or  credit 
exchange.  Under  fixed  conditions  of  economic 
life  a  community  which  has  such  a  choice  will  push 
the  use  of  each  method  of  exchange  and  payment 
to  a  point  where  its  use  for  the  exchange  of  an  addi- 
205 


MONEY 

tional  unit-volume  of  goods  would  cause  a  loss  to 
the  community.  At  this  point,  since  prices  are  ex- 
pressed in  terms  of  money,  the  marginal  utility  of 
the  available  money  supply  would  indicate  the  level 
of  prices.  But  the  marginal  utility  of  this  money 
supply  depends,  in  part,  upon  the  demand  for 
money  for  use  as  a  reserve,  to  settle  the  uncan- 
celled  balance  of  credit  transactions.  Credit  is 
therefore  properly  called  one  of  the  determinants 
of  the  price  level.  If  credit  exchanges  were  wiped 
out,  without  causing  any  diminution  in  the  demand 
for  goods,  money  would  take  on  a  higher  marginal 
utility  than  before ;  that  is,  its  value  would  rise, 
and  the  price  level  would  fall.  With  the  introduc- 
tion of  credit  payments,  an  equilibrium  would  be 
established  between  the  marginal  utility  of  money 
for  reserve  purposes  and  its  marginal  utility  for 
direct  payment.  This  would  mean  a  change  of 
the  price  level  from  that  which  obtained  in  the 
absence  of  credit  sales.  This  equilibrium  would 
emerge  when  credit  exchanges  and  direct  money 
exchanges  had  each  been  pushed  down  to  the  point 
where  the  expensiveness  of  exchange  to  society 
by  each  method  is  proportionate  to  the  volume  of 
exchanges  performed  by  each  method. 

7.  The  Effect  of  Credit  on  Prices  depends  on  the 
Completeness  of  the  Cancellation  of  Indebtedness.  — 
Let  us  suppose  that  the  volume  of  transactions  in 
a  given  community  at  a  particular  time  be  called 
ten,  all  of  which  are  done  by  direct  money  pay- 
ment. Let  us  suppose,  further,  that  over-night,  as 

206 


CREDIT    AND    PRICES 

it  were,  credit  exchange  is  suddenly  introduced,  to 
such  an  extent  as  to  effect  exchanges  to  the  extent 
of  five  of  the  ten  units  of  transactions,  on  the 
basis  of  existing  prices.  If,  of  the  five  units  of 
exchanges  now  performed  by  credit,  exchanges  to 
the  amount  of  four  units  cancel  one  another,  one 
unit  is  left  to  be  settled  by  means  of  money,  and 
the  community  must  keep  a  reserve  sufficient  to  do 
this  on  the  old  price  level.  The  four  unit-volumes 
of  money  formerly  used  have  now  been  set  free, 
and  if  it  were  destroyed,  or  sent  out  of  the  com- 
munity, the  price  level  would  not  be  changed,  be- 
cause the  work  formerly  done  by  this  money  is  now 
done  by  means  of  cancellation,  without  any  addi- 
tional strain  on  the  money  which  is  left  in  use. 
This  money,  replaced  with  credit  cancellation,  is 
likely,  in  part  at  least,  to  remain"  in  monetary  use. 
It  will,  therefore,  raise  prices  to  a  new  level.  The 
price  level  will  not  rise  in  proportion  to  the  num- 
ber of  money  units  used  for  direct  payments,  but 
will  settle  at  some  point  where  there  will  be  an 
equilibrium  between  the  marginal  utility  of  money 
for  use  in  direct  payments,  and  for  use  as  reserve. 
Another  effect,  however,  will  be  to  make  a  larger 
reserve  necessary  for  the  same  volume  of  transac- 
tions because  of  the  higher  level  of  prices.  The 
money  set  free  on  the  old  level  of  prices  will,  there- 
fore, distribute  itself  between  the  reserve  money 
and  direct  payment  money. 

If  we  suppose  the  case  of  a  country  on  an  exclu- 
sively metallic  basis,  into  which  credit  is  suddenly 
207 


MONEY 

introduced,  the  reserve  necessary  to  settle  the  un- 
cancelled  balance  of  credit  transactions  may  be 
furnished  by  the  money  which  is  set  free  from 
direct  payment  by  the  introduction  of  credit  pur- 
chases. If  this  should  happen,  we  would  have 
a  smaller  amount  of  money  to  exchange  for  a 
smaller  amount  of  goods  by  direct  payment,  but 
not  a  proportionally  smaller  amount  of  money. 
The  amount  of  goods  will  be  less,  proportionally, 
than  the  amount  of  money,  because  the  credit  pur- 
chases may  be  two  or  three  times  the  amount  of 
the  metallic  basis. 

Again,  the  introduction  of  a  less  expensive1 
medium  of  exchange  lowers  the  marginal  utility  of 
the  money  medium  in  use,  saves  some  of  the  cost 
of  exchange  to  the  community,  and,  therefore, 
again  raises  the  price  level.  Now  the  extension,  or 
refinement,  of  the  credit  mechanism  does  just  this 
thing.  Credit  exchange  is  essentially  a  return  to 
barter  by  representative  transfers  of  goods  rather 
than  by  physical  transfers.  Hence  it  saves  some 
expense  of  transfer.  In  doing  so  it  diminishes  the 
volume  of  exchanges  made  with  money,  and  thus 
causes  an  increase  in  the  quantity  of  money  rela- 
tively to  the  volume  of  work  it  has  to  do.  There- 
fore it  lowers  the  marginal  utility  of  money,  or,  in 
other  words,  raises  the  level  of  prices. 

8.  Causes  which  Produce  a  Permanent  Balance  of 
Indebtedness  which  must  be  settled  with  Money.  — 

1  Not  necessarily  cheaper  to  secure,  but  of  larger  net  efficiency, 
or  profit,  to  the  community. 

208 


CREDIT    AND    PRICES 

We  have  said  that  by  means  of  credit  we  can  make 
exchanges  of  goods  for  goods  by  simple  cancella- 
tion of  values.  The  goods  sold  on  credit  approxi- 
mate in  value  those  bought  on  credit;  there  is, 
therefore,  a  constant  approximation  to  a  complete 
cancellation.  If  this  cancellation  were  complete, 
credit,  as  has  been  remarked,  could  never  be  in 
excess  of  the  means  of  payment  available  to  set- 
tle balances.  The  cancellation,  however,  is  never 
complete,  but  always  shows  a  balance  of  opera- 
tions. This  balance  is  caused  by  a  variety  of  cir- 
cumstances, of  varying  importance.  In  the  first 
place,  it  is  quite  impossible  in  trade  to  prevent 
lack  of  coincidence  in  demand  and  supply,  either 
in  time  or  in  volume.  In  order  to  effect  a  com- 
plete cancellation  of  all  goods  bought  and  sold  on 
credit,  it  would  be  necessary  that  the  whole  amount 
bought  at  one  moment,  or  in  one  period,  should 
equal  the  whole  amount  sold  in  the  same  time. 
Now,  many  purchases  on  credit  are  purchases  for 
deferred  payment,  and,  therefore,  at  the  time  of 
purchase,  offer  no  goods  which  can  cancel  the 
demand.  The  demand,  in  other  words,  is  present ; 
the  supply  which  would  cancel  it  is  future.  There 
must,  therefore,  be  a  balance  in  such  cases.  If  all 
credit  were  based  on  goods  already  produced  and 
offered  for  sale,  and  if  in  all  cases  the  amount  of 
credit  based  on  these  goods  equalled  their  market 
value,  then  the  credit  demand  for  goods  would 
cancel  itself.  In  order  to  illustrate  this  most 
simply,  let  us  suppose  the  case  of  a  manufacturer 
p  209 


MONEY 

of  cotton  goods  and  a  planter  of  cotton.  The 
manufacturer,  having  finished  some  goods,  ships 
them  to  the  cotton  planter  and  draws  on  him  for 
the  purchase  price.  This  draft  he  gets  discounted 
at  his  bank.  In  the  meantime  the  cotton  planter 
ships  the  manufacturer  an  equivalent  value  in 
raw  cotton,  and  draws  on  him  in  turn,  and  gets 
his  draft  discounted.  Obviously  the  transactions 
balance,  and  the  drafts  coming  together,  we  may 
suppose  in  some  New  York  bank,  will  cancel 
each  other.  In  actual  trade,  however,  the  opera- 
tion is  not  so  simple  as  this,  nor  can  we  usually 
secure  an  exact  cancellation.  Either  the  demand 
of  the  manufacturer  or  that  of  the  planter  will  be 
in  excess  and  will  not  cancel  the  other.  It  is  this 
anticipatory  credit  demand  which  chiefly  deter- 
mines the  magnitude  of  the  uncancelled  balance 
of  credit  and  influences  prices.  If  business  is 
good,  the  demand  for  loans  not  based  upon  fin- 
ished goods,  but  upon  some  security  which  does 
not  immediately  cancel  the  loan,  is  likely  to  in- 
crease. In  other  words,  opportunities  for  invest- 
ment increase,  and  loans  may  be  paid  for  not  with 
present  but  with  future  goods.  Therefore  the  bal- 
ance of  credit  indebtedness  is  likely  to  become 
larger,  and  the  demand  for  standard  money  to 
settle  the  balance  must  therefore  increase. 

In  the  second  place,  exact  cancellation  is  pre- 
vented by  the  disturbances  or  accidents  of  pro- 
duction and  trade.  Changes  in  demand  for  goods, 
mistakes  in  correctly  forecasting  the  demand  and 

2IO 


CREDIT    AND    PRICES 

calculating  the  supply,  changes  of  fashion,  mis- 
takes of  judgment  in  determining  the  proper 
proportions  of  fixed  and  of  circulating  capital  in 
some  industry,  and  a  hundred  and  one  incidents 
of  business  which  are  continually  occurring,  are 
likely  to  cause  such  a  disturbance. 

Moreover,  an  unsettled  balance  of  credit  demand 
may  be  caused  by  a  breakdown  of  the  credit  ma- 
chinery at  some  point,  leaving  a  number  of  engage- 
ments unfulfilled.  This  uncancelled  balance,  too, 
calls  for  money  to  settle  it,  aside  from  that  which 
is  used  for  direct  money  exchanges.  Against  this 
uncancelled  balance  a  reserve  must  be  provided 
whose  amount  depends  upon  the  state  of  trade, 
the  business  habits  of  the  community,  and  many 
other  factors.  The  need  for  money  to  settle  this 
uncancelled  balance  of  credit  demand  is  increased, 
moreover,  by  the  distress  and  fear  that  some  people 
exhibit  in  business  transactions,  which  make  them 
unwilling  to  wait  through  the  credit  period  for  the 
fruition  of  enterprises  in  which  they  have  sunk 
their  money. 

The  more  perfect  the  cancellation,  however,  as 
has  been  repeatedly  remarked,  the  less  the  amount 
of  money  needed,  and  the  less,  therefore,  the  re- 
serve that  needs  to  be  kept.  As  credit  machinery 
becomes  more  perfect  and  more  widely  extended, 
we  should  therefore  expect  a  reduction  of  the 
amount  of  what  may  be  called  the  normal  bank 
reserve ;  that  is,  in  the  amount  which  in  ordinary 
times  the  banking  institutions  of  the  country  find 

211 


MONEY 

it  necessary  to  keep  on  hand  to  meet  the  demands 
of  their  customers  for  ready  money. 

9.  The  Influence  of  Reserves  of  Money  for  Credit 
Transactions  on  its  Value.  —  The  conclusion  of  all 
that  has  been  said  is  that  the  credit  balance  causes 
an  extra  demand  for  standard  money,  since  credit 
exchange  does  not  diminish  the  money  exchange 
as  much  as  it  would  do  if  the  cancellation  of  credit 
purchases  were  complete.  Now,  it  is  through  the 
demand  for  money  to  settle  this  uncancelled  bal- 
ance that  credit  influences  the  price  level.  The 
amount  of  money  needed  to  settle  this  uncancelled 
balance  at  any  moment  is  the  reserve  of  money 
which  a  community  needs  to  sustain  its  credit  oper- 
ations. With  a  given  supply  of  money,  a  com- 
munity will  so  adjust  its  credit  exchanges,  on  the 
one  hand,  and  its  direct  money  exchanges,  on  the 
other,  that  the  money  supply  will  be  divided  be- 
tween use  as  a  reserve  and  use  for  direct  payments, 
in  such  a  way  as  to  make  the  marginal  utility  of 
the  money  for  the  two  uses  the  same.  But  an  in- 
crease of  the  balance  of  indebtedness  necessitates 
an  increase  in  the  reserve  money  at  the  expense  of 
money  used  in  direct  payments,  and  will,  therefore, 
raise  the  marginal  utility  of  money  and  cause  a  fall 
in  the  price  level.  Now,  the  total  volume  of  trans- 
actions which  yield  a  particular  balance  may  be 
large  or  small,  for  the  same  remainder  may  be  ob- 
tained from  minuends  and  subtrahends  of  very  dif- 
ferent amounts.  In  theory,  therefore,  the  credit 
demand  for  goods  may  increase  indefinitely,  while 


CREDIT    AND    PRICES 

the  demand  for  money  as  a  basis  of  credit  transac- 
tions need  not  increase  simultaneously,  or  not  so 
rapidly,  because  the  balance  of  the  credit  demand, 
the  only  part  for  which  money  is  needed,  may  not 
increase.  If,  on  two  selected  dates,  the  volume  of 
transactions  done  on  credit  is  the  same,  but  the  bal- 
ance is  less  on  the  second  occasion  than  on  the  first, 
then  the  demand  for  money  will  be  less,  its  value 
will  be  lower,  and  prices  will  be  higher  for  the 
same  volume  of  business.  For  with  a  given  supply 
of  money,  the  demand  available  for  direct  payments 
under  these  conditions  will  be  larger.  On  the 
other  hand,  prices  may  fall,  without  any  change  in 
the  amount  of  money.  If,  apart  from  a  check  to 
business  confidence,  the  balance  of  credit  transac- 
tions becomes  greater  at  one  time  than  another, 
although  the  total  volume  of  transactions  has  not 
increased,  but  may  have  diminished,  the  demand 
for  money  must  become  greater  too.  Hence  its 
value  will  rise,  and  the  value  of  goods  will  fall. 
Reserves  must  become  larger  in  proportion  to  the 
total  volume  of  credit,  and  a  new  equilibrium  must 
be  established  between  the  marginal  utility  of 
money  for  reserves  and  its  marginal  utility  for 
direct  payment.  It  follows  that  the  level  of  prices 
may  rise  or  fall  without  any  change  in  the  vol- 
ume of  standard  money,  but  only  a  change  in  its 
distribution  for  use  as  reserve  and  as  a  means  of 
direct  payment.  These  changes  are  due,  in  other 
words,  to  the  inexactness  of  cancellation  of  credit 
transactions.  Most  of  our  credit  transactions  are 

213 


MONEY 

based  upon  bank  loans  and  discounts.  The  bank 
needs  to  keep  on  hand  an  amount  of  money  suffi- 
cient to  pay  the  balance  of  indebtedness  which  ex- 
perience shows  is  likely  to  accrue  from  day  to  day. 
If,  now,  the  balance  of  credit  transactions  increases, 
the  need  for  money  for  settlement  becomes  greater. 
The  banks,  feeling  the  pressure  of  the  demand, 
raise  their  rate  of  discount.  This  curtails  credit 
operations  and  reduces  the  difference  resulting 
from  the  offsetting  of  the  credit  claims  against  one 
another.  In  other  words,  it  reduces  the  volume  of 
business. 

If,  on  the  other  hand,  the  balance  of  credit  trans- 
actions decreases,  money  becomes  more  plentiful 
in  the  banks  and  the  rate  of  discount  falls.  Bor- 
rowing becomes  easier  and  credit  transactions  are 
thereby  stimulated.  A  new  balance  is  thereby 
established,  and  consequently  a  new  equilibrium  is 
fixed  between  credit  balances  and  the  money  reserve. 

10.  Limits  of  the  Influence  of  Credit  on  Prices.  - 
Now  this  variation  in  the  price  level,  due  to  a 
change  in  the  amount  of  credit  operations,  is  self- 
limiting.  Let  us  consider  a  case  where  prices  are 
rising,  due  to  an  increased  demand  based  upon 
the  extension  of  credit.  As  prices  go  higher,  the 
periods  of  returns  to  investments  in  different  lines 
are  likely  to  vary  more  and  more.  The  probability 
grows  less  that  a  given  amount  of  debts  will  be  off- 
set by  a  given  amount  of  other  debts,  as  the  total 
number  of  debts  increases.  Hence,  the  balance  of 
indebtedness  grows  larger.  Some  borrowers  find 

214 


CREDIT    AND    PRICES 

it  difficult  to  meet  their  engagements,  seek  an  ex- 
tension of  their  debts,  and  thus  again  disturb  the 
amount  of  cancellation  of  debts.  Under  such  cir- 
cumstances the  uncancelled  balance  must  become 
larger,  and  prices  must  fall.  The  maximum  to 
which  prices  can  rise  under  the  influence  of  credit 
demand  is,  therefore,  not  a  fixed  amount,  but  it  is 
that  at  which,  under  given  conditions  of  trade,  the 
balance  of  indebtedness  begins  to  grow  and  the 
strain  upon  the  money  reserve  is,  therefore,  greater. 

On  the  other  hand,  the  lowest  point  to  which 
prices  can  fall,  while  business  is  done  by  means  of 
credit,  is  the  point  at  which  the  total  credit  opera- 
tions have  so  far  contracted  that  the  balance  of 
indebtedness  grows  smaller  and  smaller,  requiring 
a  smaller  amount  of  money  to  settle  it  and  thus 
enlarging  the  reserve.  The  easy  money  thus  pro- 
duced attracts  borrowers  and  stimulates  the  credit 
demand  for  goods.  Then  the  price  level  turns 
upward  again. 

11.  Interaction  of  the  Demand  for  Money  for 
Reserves  and  for  Direct  Exchanges.  —  All  that  has 
been  written  is  on  the  assumption  that  the  trans- 
actions which  are  done  on  the  ready-money  basis 
have  not  changed.  This,  however,  is,  of  course, 
contrary  to  fact.  There  is  a  constant  flux,  a 
constant  intercommunication,  between  the  amount 
of  money  and  the  volume  of  credit.  Let  us  for  a 
moment  suppose  that  the  total  amount  of  money 
in  a  community  is  fixed,  and  let  us  further  confine 
our  attention  to  standard  money.  At  any  given 

2I5 


MONEY 

time  this  money  is  divided  in  a  certain  proportion 
between  the  credit  and  the  ready-money  transac- 
tions. On  a  given  price  level,  a  certain  volume 
of  ready-money  business  is  done,  and  a  certain 
amount  of  money  is  needed  to  do  it.  At  the  same 
time  a  certain  volume  of  credit  business  is  done, 
and  a  certain  amount  of  money  is  needed  as  a 
reserve,  or  basis,  on  which  to  do  this.  It  has  been 
pointed  out  that  if  there  is  a  more  complete  can- 
cellation of  indebtedness  and,  therefore,  a  smaller 
balance,  from  the  offsetting  of  credit  instruments 
against  one  another,  the  amount  of  reserve  needed 
will  become  less.  A  certain  amount  of  ready 
money  is,  therefore,  set  free  from  supporting  credit 
transactions.  We  have  supposed  that  it  will  be- 
come the  basis,  or  reserve,  for  an  additional  volume 
of  credit  operations ;  but  if  we  take  into  account, 
as  we  are  now  doing,  the  presence  of  transactions  in 
ready  money,  it  may  happen  that  the  money  set 
free  from  the  support  of  credit  business  may  all  go 
into  circulation  in  the  sphere  of  the  ready-money 
business.  In  that  case  the  value  of  money,  the 
supply  being  increased,  will  fall,  and  prices  will 
rise,  so  far  as  they  are  dependent  upon  the  quan- 
tity of  money  available  for  the  unchanged  amount  of 
direct  money  payments,  or,  what  is  the  same  thing, 
upon  ready-money  demand  for  goods.  This  result 
is  precisely  what  we  arrived  at  when  we  supposed 
that  the  money  set  free  would  be  used  as  a  basis 
of  new  credit  operations.  Whichever  way  the 
freed  money  turns,  therefore,  it  will  give  an  up- 
216 


CREDIT    AND    PRICES 

ward  fillip  to  prices.  All  the  free  money  cannot 
go  to  the  ready-money  transactions,  however,  for 
it  would  thereby  raise  prices  above  the  level  pro- 
duced by  the  credit  demand.  Practically,  the  price 
level  will  be  a  new  equilibrium  between  the  amount 
necessary  as  a  reserve  for  the  diminished  balance 
of  credit  and  the  increased  volume  available  for 
direct  payments. 

Similarly,  if  the  existing  equilibrium  between  the 
balance  of  indebtedness  and  the  money  reserve  is 
disturbed  by  an  increase  in  the  balance  of  indebted- 
ness, a  strain  is  thrown  upon  the  money  used  in 
the  ready-money  transactions.  Its  value  rises,  and 
prices,  therefore,  tend  to  fall.  In  a  regime  where 
there  were  no  ready-money  transactions,  the  result 
would  be  only  a  contraction  of  credit  transactions, 
in  order  to  diminish  the  credit  balance;  practically, 
both  results  would  doubtless  follow.  Credit  will 
contract  far  enough  to  produce  a  balance  of  in- 
debtedness which,  in  conjunction  with  an  increased 
demand  for  money  in  ready-money  transactions, 
will  produce  a  new  price  equilibrium. 

It  will  be  necessary  to  consider  now  what  results 
will  follow  if  the  existing  price  equilibrium  is  dis- 
turbed primarily  by  a  change  in  the  amount  of 
money  used  in  ready-money  transactions.  It  is  not 
hard  to  trace  these  effects,  after  what  has  been 
said.  If,  for  any  reason,  the  demand  for  money 
in  the  ready-money  part  of  business  should  in- 
crease, the  necessary  addition  could  be  drawn  only 
from  the  reserve  on  which  credit  transactions  were 
217 


MONEY 

based.  Means  would  have  to  be  taken  to  reduce 
the  balance  of  indebtedness  by  a  more  complete 
cancellation,  or  the  total  volume  of  credit  transac- 
tions must  decrease,  until  a  new  balance  was  found 
which  could  rest  upon  the  diminished  money  re- 
serve. Under  the  pressure  of  these  changes,  the 
marginal  utility  of  money  would  be  greater,  and 
the  price  equilibrium  somewhat  lower.  Similarly, 
if  the  need  for  money  in  ready-money  business 
should  fall  off,  the  reserve  available  for  credit 
business  would  be  larger,  there  would  probably 
be  a  disturbance  of  the  uncancelled  balance,  and 
the  price  level  would  be  a  new  equilibrium  between 
the  marginal  utilities  of  money  for  the  two  services, 
on  a  higher  level  of  prices.  The  resulting  price 
level  would  be  found  somewhere  between  the  points 
at  which  it  would  settle  from  a  change  in  the  ready- 
money  business,  and  from  a  change  in  the  credit 
business,  acting  alone. 

In  order  to  make  our  discussion  complete,  we 
need  now  to  consider  the  effect  of  an  increase  in 
the  total  volume  of  money.  This  has  been  so 
fully  discussed  in  another  connection  that  we 
need  only  refer  to  it  here.  The  first  effect 
would  probably  be  to  stimulate  credit  business, 
because  new  money  finds  its  way  into  circulation 
generally  through  the  banks.  An  increased 
credit  demand  for  goods  would  raise  their  prices, 
and  a  higher  price  level  would  necessitate  a  larger 
amount  of  money  in  active  circulation,  in  order 
to  perform  easily  the  ready-money  portion  of  busi- 

218 


CREDIT    AND    PRICES 

ness.  The  additional  money  would  be  divided, 
therefore,  between  the  reserve  necessary  for  credit 
and  the  money  necessary  for  ready-money  business, 
in  a  proportion  which  would  produce  a  margi- 
nal utility  for  reserve  money  identical  with  that 
of  the  money  used  in  direct  payments,  and  this 
would  be  a  lower  value,  or  a  higher  price  level. 

Professor  Essars  has  shown  :  that  the  German 
banks,  where  checks  are  largely  used,  need  a 
smaller  balance  in  turning  over  a  given  amount 
of  money  than  do  the  French  banks  with  a  smaller 
use  of  checks.  This  means  that  the  more  com- 
monly payments  are  made  by  check  into  a  bank, 
so  that  the  smaller  the  difference,  or  balance, 
between  its  debts  and  credits,  the  less  money  is 
needed  by  the  bank.  This  difference  may  be 
regarded,  as  has  already  been  remarked,  as  a 
normal  reserve,  and  doubtless  tends  to  become 
smaller  as  cancellation  becomes  more  perfect. 

12.  Influence  of  Different  Kinds  of  Credit  Transac- 
tions on  Prices.  —  Credit  transactions  are  to  be 
distinguished  according  as  they  do,  or  do  not, 
give  rise  to  credit  instruments  which  circulate, 
or  perform  payments  by  passing  from  hand  to 
hand  like  money.  A  purchase  on  credit  may 
be  registered  in  a  book,  and  cancelled  at  a  later 
time  by  another  similar  entry.  This  is  the  sim- 
plest form  of  book  credit,  or  registering  of  de- 
ferred payments.  In  this  case,  the  credit  granted 

1  "La  Vitesse  de  la  Circulation  de  la  Monnaie,"_/0zw.  de  la  So- 
ciete  de  Statistique  de  Paris,  April,  1895. 

219 


MONEY 

is  not  used  as  a  basis  for  new  credit.  On  the 
other  hand,  a  purchase  or  a  loan  may  be  evi- 
denced by  the  issue  of  a  piece  of  paper,  whether 
note,  check,  or  bill  of  exchange,  that  may  be  used 
to  make  more  than  one  payment  before  it  is  re- 
tired. It  is  important  to  determine  whether  the 
former  kind  of  credit  transactions  exert  less  or 
more  influence  on  prices  than  do  the  latter.  Not 
infrequently  it  is  thought  that  the  circulating  char- 
acter of  certain  credit  instruments  gives  greater 
power  over  the  price  level  to  the  class  of  transac- 
tions out  of  which  they  arise,  than  is  imputable  to 
ordinary  book  credit.  This  opinion  doubtless  is 
based,  in  part  at  least,  upon  the  close  resemblance 
of  the  service  which  these  credit  instruments  per- 
form to  the  work  of  money.  It  is  plausible  to 
think  that  since  credit  instruments  discharge  obli- 
gations as  does  money,  they  are  simply  an  addition 
to  the  medium  of  exchange,  with  all  the  functions 
that  money  possesses.  This,  however,  is  hardly 
a  correct  view  to  take.  Strictly  speaking,  these 
credit  instruments  do  not  give  rise  to  a  greater 
volume  of  credit ;  rather  are  they  results  of  a  greater 
volume  of  credit.  They  give  greater  mobility  to 
the  credit  demand  to  which  a  given  amount  of 
goods  gives  rise.  In  the  case  of  ordinary  book 
credit,  the  volume  of  the  credit  demand  remains 
unchanged  and  uncancelled  until  the  expiration  of 
the  credit  period.  In  the  case  of  credit  demand 
out  of  which  credit  instruments  arise,  the  credit 
granted  is  immediately  made  the  basis  of  a  new 

220 


CREDIT    AND    PRICES 

credit,  and  this,  in  turn,  of  another,  creating  a 
series  of  transactions,  only  the  last  of  which  is 
likely  to  call  for  money.  The  credit  instruments, 
then,  are  simply  a  means  of  giving  greater  mobility 
to  the  credit  demand.  The  greater  the  duration 
of  their  circulation,  the  larger  the  total  volume 
of  credit  cancellation  which  they  will  perform,  but 
the  larger  is  the  uncancelled  balance  of  credit 
demand  for  goods  likely  to  be.  For  this  reason, 
a  given  volume  of  credit  transactions  of  the  class 
that  gives  rise  to  circulating  instruments  of  credit 
is  likely  to  influence  prices  more  than  an  equal 
volume  of  credit  transactions  which  do  not  origi- 
nate such  instruments.  The  greater  influence  of 
this  kind  of  credit  transactions  on  prices  is  due, 
therefore,  not  to  anything  in  the  nature  of  the 
instruments  of  credit,  but  to  the  fact  that,  making 
possible,  as  they  do,  a  greater  volume  of  credit  de- 
mand, the  uncancelled  balance  is  likely  to  be  larger. 
13.  Deposit  Currency.  —  Modern  banking  has 
developed  a  method  of  cancellation  by  means  of 
book  credit  which  is  far  more  rapid  and  effective 
than  can  be  attained  by  circulating  instruments 
like  bank  notes.  This  bank-book  credit  is  called 
deposit  currency,  and  consists  of  the  deposits  to 
the  credit  of  individuals  on  the  books  of  the  bank. 
It  is  these  deposits  against  which  checks  are  drawn, 
and  which  form  the  most  common  paying  medium 
in  highly  developed  commercial  centres.  Indeed, 
in  such  centres,  deposit  currency  plays  a  far 
more  important  part  than  does  note  currency. 

221 


MONEY 

The  latter  is  adapted  more  particularly  to  com- 
munities in  which  the  population  is  more  widely 
scattered,  and  access  to  banks  is  more  difficult. 
Under  such  conditions  the  possibilities  of  can- 
cellation are  less,  and  a  larger  amount  of  cur- 
rency is  needed,  of  the  kind  which  will  pass  from 
hand  to  hand  indefinitely ;  whereas  deposit  cur- 
rency, represented  by  checks,  must,  from  its  very 
nature,  return  quickly  to  the  banks.  The  relative 
importance  of  the  two  kinds  of  medium  of  exchange 
may  be  seen  from  the  fact  that  on  September  9, 
1903,  the  national  banks  of  the  United  States  held 
$3>: 56,333, 499  individual  deposits  against  which 
checks  were  drawn,  and  only  $375,037,815  of 
notes  outstanding.  This  deposit  currency  arises 
from  discounts.  When  a  merchant  takes  a  bill  of 
exchange,  or  a  promissory  note,  to  his  bank,  the 
bank  gives  him  its  face  value  minus  the  discount, 
and  credits  him  with  the  amount  as  a  deposit. 
Obviously,  if  all  the  merchants  of  a  community 
did  their  business  at  the  same  bank,  their  checks 
coming  into  this  bank  would  cancel  one  another, 
and  the  whole  discharge  of  indebtedness  between 
them  could  be  performed  by  transfers  of  credits 
on  the  books  of  the  bank.  Of  course  there  is 
usually  more  than  one  bank  in  a  community,  and 
not  all  the  tradesmen  of  the  same  place  do  busi- 
ness at  the  same  bank.  Under  these  circum- 
stances the  cancellation  is  accomplished  through 
an  agency  known  as  a  clearing-house.  This  is 
simply  an  institution,  or  a  place,  where  the  banks 

222 


CREDIT    AND    PRICES 

in  the  community  exchange  the  checks  on  one 
another,  received  from  their  patrons,  and  pay  the 
balance  against  them  i^vcash.  Indeed,  they  do 
not  always  pay  the  balances  in  cash,  but  some- 
times by  drafts  on  the  clearing-house,  which  are 
entered  in  the  books  of  that  institution  to  the  credit 
of  the  banks  in  favor  of  which  they  are  drawn. 
Cancellation  is  thus  carried  to  its  most  profitable 
extent,  and  the  amount  of  money  necessary  to 
settle  a  huge  volume  of  transactions  is  reduced  to 
a  minimum. 

It  should  be  noticed  that  the  influence  of  credit 
in  raising  prices  is  cumulative.  If  the  credit  de- 
mand for  goods  raises  the  price,  the  possessor  of 
those  goods  can  get  larger  credit  at  his  bank,  since 
he  borrows  on  the  new  valuation.  If  business  is 
good,  and  if  confidence  and  buoyancy  prevail,  this 
process  may  repeat  itself  until  prices  are  forced  to 
a  very  high  level.  The  amount  of  credit  based 
upon  goods  at  this  high  level  of  prices  may  be  so 
great  that  the  balance,  after  cancellation,  may  be 
greater  than  the  reserve  can  carry.  In  that  case 
the  business  community  is  face  to  face  with  a 
monetary  stringency,  if  not  a  crisis.  The  credit 
must  be  contracted,  or  an  increased  amount  of 
money  must  be  obtained  for  a  reserve.  Herein 
lies  the  great  danger  of  credit  as  a  means  of  pay- 
ment. Unless  the  granting  of  credit  is  carefully 
guarded,  it  may  lead  to  an  inflation  of  prices  that 
will  destroy  confidence  and  cause  great  loss  to  the 
community  by  a  sudden  fall  of  the  price  level. 
223 


/**^  -     f*>lf&*t>T''C'T>      VTT 

I    i-4jft  OriArlilrK    All 

^^u 

THE   MEASUREMENT    OF    VARIATIONS   IN  THE   PUR- 
CHASING  POWER   OF   MONEY 

REFERENCES  :  Adams,  T.  S.,  Index  Numbers  and  the  Standard 
of  Value,  Journ.  Pol.  Econ.,  December,  1901,  March,  1902 ;  Com- 
mons, J.  R.,  Quarterly  Bulletin  No.  2,  Bureau  of  Economic  Research, 
October,  1900;  Edgeworth,  F.  Y.,  Report  of  the  British  Association 
for  the  Advance  of  Science,  1887,  pp.  254-301,  1888,  pp.  188-219, 
1890,  pp.  133-164;  Econ.  Journ.,  Vol.  IV.,  p.  159;  Journ.  Royal 
Statis.  Soc.,  1883  (Vol.  XLVL),  p.  714,  1888  (Vol.  LI.),  p.  346; 
Falkner,  R.  P.,  United  States  Senate  (Aldrich)  Report  on  Wholesale 
Prices,  1893  ;  Jevons,  W.  S.,  Investigations  in  Currency  and  Finance, 
pp.  13-159;  Journ.  Royal  Statis.  Soc.,  1879,  1884,  1886,  pp.  592, 
648,  1893,  pp.  220,  247,  1903,  pp.  87,  616;  Laspeyres,  E.,  Die  Be- 
rechnung  einer  mittleren  Waarenpreissteigerung,  Jahrb.  fiir  Nat.  u. 
Stat.,  B.  XVI.,  pp.  296-314;  Laughlin,  J.  L.,  Principles  of  Money, 
Ch.  6  ;  Nicholson,  J.  S.,  Money  and  Monetary  Problems,  5th  ed., 
pp.  312-342  ;  Padan,  R.  S.,  Prices  and  Index  Numbers,  Journ.  Pol. 
Econ.,  March,  1900;  Pierson,  N.  G.,  Further  Considerations  on 
Index  Numbers,  Econ.  Journ.,  March,  1896  ;  Taussig,  F.  W.,  Results 
of  Recent  Investigations  on  Prices  in  the  United  States,  Yale  Rev., 
November,  1893;  Walras,  L.,  Elements  d'Economie  Politique  Pure, 
pp.  431-432,  457-468;  Theorie  de  la  Monnaie,  Pt.  3;  Walsh, 
C.  M.,  The  Measurement  of  General  Exchange  Value. 

1.  On  the  Possibility  of  measuring  Changes  in 
the  Value  of  Money.  —  Attempts  have  been  made 
from  time  to  time  to  measure  in  terms  of  goods  the 
amount  of  change  which  the  purchasing  power  of 
money  undergoes.  In  such  attempts,  of  course, 
224 


MEASUREMENT  OF  CHANGES  IN  PRICES 

no  attention  is  paid  to  the  causes  of  the  changes. 
The  inquiry  has  to  do  merely  with  the  extent  of 
the  change.  It  makes  no  difference  for  this  pur- 
pose whether  "  it  is  the  pence  that  are  few  or  the 
eggs  that  are  many  "  ;  nor  is  it  of  importance  to 
ask  whether  a  change  in  value  due  to  a  change  in 
the  supply  is,  or  is  not,  influenced  by  simultaneous 
changes  in  commodities.  The  sole  question  con- 
cerning the  change  is  :  Can  we  measure  it  ?  The 
possibility  of  doing  so  has  been  scouted  by  some, 
who  insist  that  we  cannot  measure  the  variation  of 
one  thing  in  terms  of  another  thing,  if  both  vary 
at  the  same  time,  partly  or  wholly,  from  indepen- 
dent causes.  But  surely  this  position  is  not  cor- 
rect. Although  our  standard  varies,  if  we  can 
measure  its  variations,  or  can  show  that  they  are 
according  to  a  certain  law,  it  will  serve  the  pur- 
pose of  a  standard  as  well  as  if  it  were  absolutely 
fixed. 

2.  The  Importance  of  Measurements  of  Price 
Changes.  —  Ability  to  measure  variations  in  the 
purchasing  power  of  money  is  of  importance  for 
several  reasons.  It  is  desirable,  in  the  first  place, 
in  order  to  fix  the  value  of  deferred  payments, 
especially  those  which  run  for  a  long  time.  We 
have  seen  that  hardship  may  be  caused  by  varia- 
tions in  the  value  of  money.  If  we  could  measure 
these  variations  periodically,  and  correct  them,  we 
would  attain  the  purpose  of  an  invariable  standard  ; 
for  all  that  it  would  be  necessary  to  do  to  prevent 
one  person  from  gaining  at  the  expense  of  another, 
Q  225 


MONEY 

on  account  of  the  variation,  would  be  to  compute  its 
amount. 

In  the  second  place,  the  ability  to  measure  such 
variations  enables  us  to  compare  the  relative  values 
of  wages  and  incomes  in  different  places,  and  at 
different  times.  This  is  a  matter  of  some  moment 
to  those  who  have  expenditures  to  make  in  many 
places.  The  investor  whose  capital  is  placed 
in  the  enterprises  of  half  a  dozen  countries  is  a 
much  interested  party  in  the  comparative  values  of 
one  ounce  of  gold  in  these  different  places.  Nor 
is  the  academic  reason  for  desiring  to  measure 
these  variations  altogether  to  be  despised.  It  is 
of  no  little  interest  to  be  able  to  compare  the  pur- 
chasing power  of  money  at  different  periods  in 
history,  for  the  inquiry  throws  much  light  upon 
the  economic  condition  of  the  various  social  classes 
at  different  times,  and  affords  a  kind  of  measure  of 
social  progress. 

3.  Nature  of  the  Problem.  —  What  we  are  called 
on  to  do  is  to  determine,  in  the  first  place,  the 
relation  of  a  certain  property  of  one  variable,  A, 
which  is  subject  to  numerous,  undetermined  causes 
of  variation,  to  a  similar  property  possessed  by  a 
multitude  of  variables,  of  which  A  itself  is  one, 
similarly  subject  to  numerous  causes  of  variation, 
which  are  not  fully  known  ;  in  the  second  place,  to 
do  this  for  different  times,  so  as  to  compare  these 
ratios,  although  in  the  meantime  new  causes  of 
variation  may  have  come  in  and  old  ones  may 
have  dropped  out,  and  the  relative  importance  of 

226 


MEASUREMENT  OF  CHANGES  IN  PRICES 

the  various  causes  may  have  greatly  changed.  If 
we  might  seek  an  illustration  to  enforce  the  idea  of 
the  complexity  of  the  problem,  we  might  say  that 
we  are  to  determine  at  a  certain  moment  the  ratio 
of  the  height  of  one  wave  of  the  sea  to  the  average 
height  of  all  the  waves,  including  the  one  which  is 
selected  for  comparison.  The  problem  is  theoreti- 
cally solvable  and  the  answer  is  some  kind  of  an 
average.  This  average  tells  us  nothing  about  the 
prices  of  individual  goods.  They  may  be  higher 
or  lower  than  the  general  level,  in  approximately 
equal  numbers ;  or  many  may  differ  from  it  only  a 
little,  and  a  few  a  great  deal.  In  comparing  any 
average  with  an  average  computed  at  a  previous 
date,  if  we  find  it  higher  we  must  not  conclude 
that  the  price  of  every  article  has  risen  ;  nor  when 
a  fall  in  general  prices  or  in  the  "  price  level "  has 
occurred,  that  the  price  of  every  article  has  fallen. 
It  is  conceivable  that  all  but  one  may  have  risen  or 
fallen,  but  the  average  will  not  show  this.  The 
change  may  be  due  to  the  one,  and  not  to  the 
many.  Our  result  will  therefore  be  more  or  less 
valuable  according  to  the  extent  of  our  knowledge 
of  the  factors  which  determine  it,  and  according  to 
the  purpose  for  which  we  intend  to  use  it.  Differ- 
ent averages  are  suited  to  different  purposes.  Any 
intelligent  use  of  an  average  of  prices  must  have 
regard,  therefore,  to  the  purpose  for  which  that 
average  was  prepared. 

4.    Index    Numbers.  —  The    usual    method    of 
measuring  changes  in    the    purchasing  power   of 
227 


MONEY 

money  is  by  means  of  index  numbers.  An  index 
number  is  a  number  which  represents  the  price  of 
a  chosen  commodity,  or  group  of  commodities,  or 
the  average  of  closely'  consecutive  prices  of  those 
commodities,  at  a  selected  date,  which  is  used  as  a 
standard  wherewith  we  may  compare  the  prices 
of  the  same  article  at  later  dates.  Suppose,  for 
example,  that  sugar  is  quoted  at  20  pounds  for 
$i  to-day,  and  at  16  pounds  for  $i  at  some  day 
next  week.  The  price  of  20  pounds  on  the 
latter  date  will  be  $1.25,  and  the  latter  price  is 
to  the  former  as  125  to  100,  and  the  100  may  be 
called  the  index  number.  Instead  of  taking  the 
price  of  a  single  article  as  a  standard,  it  is  better, 
however,  to  take  the  average,  or  the  sum  of  the 
prices,  of  a  number  of  different  articles,  either  at  a 
single  selected  date,  or  for  a  selected  period.  The 
price  of  each  article  on  the  selected  date  is  called 
100  and  the  number  which  expresses  its  price,  in 
terms  of  this  base,  at  another  date,  is  in  the  ratio 
of  the  later  price  to  the  earlier.  The  sum  of  the 
later  numbers  divided  by  the  number  of  the  arti- 
cles will  give  the  average  for  the  later  date,  and 
the  difference  of  this  average  from  the  base,  100, 
will  show  the  change  in  the  purchasing  power  of 
money  over  the  goods  that  are  chosen  to  make  up 
the  table.  The  standard  formed  either  of  all  ven- 
dibles, or  of  a  selected  list,  whose  prices  are  thus 
manipulated  for  the  determination  of  the  base  for 
the  price  level,  is  called  a  tabular  standard. 

We  may  illustrate  the  formation  of  index  num- 
228 


MEASUREMENT  OF   CHANGES  IN  PRICES 


bers  by  the  following  table  of  prices  of  six  selected 
commodities :  — 


188O 

1890 

1900 

PRICE  —  BASE 

PRICE  —  RED. 
TO  BASE 

PRICE  —  RED. 
TO  BASE 

Steel,  per  ton  .     .     . 

$25.00-100 

$23.00-  92 

$26.00-104 

Corn,  per  bu. 

.50-100 

•45-  90 

.55-110 

Wheat,  per  bu.    .     . 

.90-100 

.92-102 

•95-i°5 

Wool,  per  Ib.       .     . 

.30-100 

•25-  83* 

.28-  90 

Coal,  per  ton  .     .     . 

2.OO-IOO 

i.  80-  90 

2.10-105 

Sugar,  per  bbl.     . 

15.00-100 

14.50-  96! 

14.00-  93 

IOO 

6)554 

6)6oy 

92* 

ioi£ 

In  1880,  the  first  date  selected,  the  price  of  each 
article  is  called  100.  Hence  the  simple  average 
of  the  prices,  or  the  base,  is  100.  In  1890,  the 
prices  having  changed  as  indicated,  the  average 
becomes  92^  ;  and  in  1900,  iQi-J.  That  is,  as  com- 
pared with  1 880  the  average  of  prices,  estimated  in 
these  goods,  was  7^  per  cent,  lower  in  1890,  and  i|- 
per  cent,  higher  in  1900. 

Instead  of  regarding  the  price  of  each  article  in 
the  basic  year  as  100,  we  might  simply  add  the 
actual  prices  of  each  year  and  divide  by  the  num- 
ber of  articles.  The  ratio  of  the  average  of  each 
later  year  to  that  of  1880  would  then  show  the 
courses  of  the  averages.  Thus,  the  averages  would 
be  43.70,  40.90,  and  43.88.  Regarding  the  first  as 

229 


MONEY 

100,  the  others  are  93.6  and  100.4,  respectively. 
The  results  are  different,  but  the  course  is  the 
same. 

5.  Limitations  of  Index  Numbers.  —  The  ac- 
curacy and  serviceableness  of  such  an  index  as 
has  been  described  are  open  to  criticism  both 
on  theoretical  and  practical  grounds.  Its  value 
depends  upon  the  kind  of  average  used  in  com- 
puting the  base,  upon  the  number  of  articles 
selected,  upon  the  amount  of  each  article,  upon 
the  kind  of  prices  used,  whether  wholesale  or 
retail,  upon  the  accuracy  of  the  price  observations, 
and  upon  the  extent  of  territory  within  which  the 
price  observations  may  be  regarded  as  applicable. 

There  are,  then,  many  "if's"  in  the  way  of  se- 
curing a  satisfactory  table  of  prices.  If  (i)  we 
could  be  sure  of  getting  an  accurate  and  just  mean 
for  our  base ;  if  (2)  all  goods  could  be  included  in 
making  a  tabular  standard ;  if  (3)  we  could  deter- 
mine in  what  proportion  the  goods  should  be  used 
in  order  to  form  a  universally  just  measure;  if  (4) 
we  had  to  do  always  and  everywhere  with  the 
same  goods  in  the  same  quantities  and  of  the  same 
qualities;  if  (5)  their  exact  prices  were  ascer- 
tainable  and  universally  applicable ;  and  if,  finally, 
sundry  other  conditions,  which  depend  upon  the 
specific  purpose  in  hand,  could  be  fulfilled,  then 
we  might,  perhaps,  frame  an  accurate  measure  of 
the  variation  of  the  purchasing  power  of  money 
in  terms  of  goods.  In  other  words,  we  could 
measure  changes  in  the  price  level  so  far  as  it  is 

230 


MEASUREMENT  OF   CHANGES  IN  PRICES 

determined  by  the  value  of  material  things.  But 
the  value  of  money  may  vary  with  reference  to 
other  things  than  material  goods, — as  wages, 
rent,  and  incomes  from  other  sources.  The  unit  of 
measure  in  all  these  cases  would  be  different  from 
the  one  which  we  have  hypothetically  described. 

6.  The  Kind  of  Average  used  in  Computing  Index 
Numbers.  —  The  first  thing  necessary  is  to  decide 
on  the  kind  of  average  of  prices  which  we  are  to 
use  as  a  basis  in  making  our  comparisons.  Differ- 
ent writers  have  used  different  averages,  including 
the  arithmetical,  the  geometric,  the  harmonic,  and 
the  median. 

If  we  use  the  arithmetical  average  as  the  aver- 
age, or  mean,  price  of  an  article  through  a  period, 
we  simply  add  the  terms  of  the  series  of  prices 
and  divide  by  their  number.  If  we  use  the  geo- 
metric average,  we  multiply  the  numbers  in  the 
series  of  prices  in  the  period  and  take  that  root  of 
the  product  indicated  by  the  number  of  terms.  If 
we  use  the  harmonic  average,  we  find  the  reciprocal 
of  the  arithmetical  average  of  the  series  of  prices. 
The  median  is  that  term  of  the  series  which  has 
as  many  terms  above  it  as  below  it. 

To  illustrate  :  Suppose  the  price  of  a  pound  of 
cotton  for  five  successive  days  was  5,  6,  8,  9,  and 
1 1  cents,  respectively.  The  arithmetical  average 
price  would  be  7.8;  the  geometric,  7.5;  the  har- 
monic, 7.2  ;  and  the  median,  8.  The  arithmetical 
average  of  a  given  set  of  numbers  is  larger  than 
the  geometric  or  the  harmonic. 
231 


MONEY 

Apparently,  the  answer  to  the  question  how 
much  prices  have  changed  in  a  given  period,  will 
depend  largely  upon  the  particular  average  chosen. 
It  might  appear,  therefore,  a  matter  of  some  im- 
portance to  decide  which  is  the  proper,  or  the 
best,  mean  to  use.  The  arithmetical  mean  is  sim- 
ple and  easily  found,  but  it  is  much  disturbed  by 
violent  fluctuations.  That  is,  it  gives  emphasis  to 
the  large  numbers.  The  geometric  mean,  on  the 
other  hand,  increases  the  influence  of  the  smaller 
numbers,  but  it  is  more  tedious  to  calculate.  It  is 
appropriate  in  a  problem  where  the  "  quaesitum  is 
a  real  thing  or  at  least  a  unique  type  (as  the  aver- 
age stature  of  a  nation),  or  if  the  errors  or  devia- 
tions from  the  true  mean  which  the  data  present 
obey  a  certain  law  of  dispersion,  which  there  is 
some  reason  for  expecting  prices  to  fulfil." : 
Moreover,  the  geometric  mean  is  "  more  likely 
than  the  arithmetic  mean  to  correspond  to  the 
greatest  ordinate  of  the  unsymmetrical  curve 
which  the  statistics  of  prices  are  apt  to  form."  2 

The  median,  like  the  arithmetical  mean,  is  easily 
found,  but  it  may  vary  much  from  type ;  that  is,  it 
may  be  far  from  any  actual  price.  It  is  less  dis- 
turbed, however,  by  sudden  great  changes  than  is 
the  arithmetical  mean.  The  harmonic  mean  is 
best  to  apply  if  there  is  a  large  number  of  low 
prices,  and  a  small  number  of  large  ones,  in  the 
series. 

1  Edgeworth  in  Econ.  Journ.,  Vol.  IV.,  p.  159. 
*  Jonrn.  Royal  Slat.  Soc.,  1888,  p.  356. 
232 


MEASUREMENT  OF   CHANGES  IN  PRICES 

But  the  mathematical  characteristics  of  the  dif- 
ferent means  do  not  enable  us  to  determine  which 
one  to  use.  No  one  of  these  means  is  to  be  chosen 
because  it  is  mathematically  the  most  exact.  The 
basis  of  choice  is  the  economic  purpose  in  view. 
If  we  have  a  number  of  prices  that  vary  but  little 
from  one  another,  and  our  purpose  is  to  determine 
how  much  money  must  be  given  on  two  separate 
dates,  assuming  that  the  same  number  of  units  of 
goods  are  sold  on  the  two  dates,  the  arithmetical 
mean  is  best.  If  we  want  to  determine  changes 
in  the  purchasing  power  of  money  as  measured 
by  total  mass  of  goods  purchasable,  irrespective  of 
their  proportions,  the  geometric  mean  will  best 
serve  our  purpose.  If,  in  the  series  of  prices, 
there  are  a  good  many  which  changed  but  little, 
and  a  few  which  had  changed  very  largely,  the 
harmonic  mean  would  be  the  best  to  use. 

7.  The  Number  of  Articles  necessary  to  Furnish 
Proper  Averages. — The  number  of  articles  to  be 
chosen  for  the  table  of  prices  is  mainly  a  question 
of  convenience,  provided  it  is  large  enough  to  be 
fairly  representative,  and  provided  that  the  articles 
are  those  of  the  widest  demand.  Opinions  differ, 
of  course,  as  to  what  things  should  enter  into  the 
list,  at  least  after  a  certain  number  have  been 
named ;  but  there  are  many  on  which  all  persons 
agree.  The  error  due  to  a  restriction  of  a  number 
of  vendibles  cannot,  then,  be  wholly  eliminated ; 
but  the  whole  calculation  is  of  so  rough  a  character 
that  we  can  afford  to  neglect  the  error  due  to  this 

233 


MONEY 

cause.  Moreover,  we  must  understand  in  the  case 
of  this  source  of  error,  as  in  the  case  of  others, 
that  if  it  is  approximately  constant,  it  cannot  affect 
the  correctness  of  the  relationships  indicated  by 
the  results.  We  may,  therefore,  conclude  that  a 
list  of  articles  ordinarily  chosen  in  such  tables  as 
those  of  Sauerbeck  and  Soetbeer  are  sufficiently 
numerous  to  serve  the  purpose. 

8.  Relative  Proportions,  or  Weights,  of  Articles 
Used.  —  But  after  we  have  determined  what  arti- 
cles shall  enter  into  our  table,  we  must  also  fix 
upon  the  relative  proportions  of  these  articles. 
Goods  are  not  all  of  equal  importance.  A  table 
which  gave  equal  weight  to  wheat  and  pepper,  for 
example,  would  be  misleading.  As  to  what  con- 
stitutes, or  determines,  the  importance  of  goods  in 
this  connection,  opinions  differ  widely,  so  that  vari- 
ous measures  have  been  suggested.  The  relative 
importance  of  goods,  economically  speaking,  may 
be  estimated,  for  the  purposes  of  index  numbers, 
on  the  basis  of  the  relative  quantities  produced,  of 
the  relative  amounts  exported  or  imported,  of  the 
proportions  in  which  they  enter  into  the  consump- 
tion of  the  mass  of  the  people,  or  in  any  one  of 
half  a  dozen  other  ways.  Mr.  Inglis  Palgrave  has 
chosen  to  weight  the  articles  in  his  computation 
according  to  their  relative  importance  in  exports 
and  imports.  Soetbeer  and  Sauerbeck  weight  the 
articles  in  their  tables  according  to  their  relative 
annual  consumption.  Professor  Falkner,  in  the 
United  States  Senate  Report  on  Wages,  Prices, 

234 


MEASUREMENT  OF   CHANGES  IN  PRICES 

and  the  Cost  of  Living,  chose  to  list  the  articles 
in  his  tables  in  the  proportions  in  which  they  enter 
into  the  budget  of  expenses  of  the  average  work- 
ingman ;  and  Mr.  Giffen,  a  good  many  years  ago, 
proposed l  to  use  as  his  index  numbers  the  ratio 
whose  numerators  are  the  price  of  the  whole 
amount  of  each  article  consumed  in  the  standard 
year,  taken  at  the  prices  of  each  later  year ;  and 
whose  denominators  are  the  same  quantities  at  the 
prices  of  the  standard  year.  Here  again  we  find 
that,  whichever  method  is  adopted,  we  may  expect, 
on  the  whole,  similar  indications  in  the  results.  All 
that  is  necessary  is  that  the  calculation  of  the  price 
level  at  successive  dates  shall  be  made  in  the  same 
way,  with  data  which  show  the  same  facts  for  dif- 
ferent periods.  Indeed,  although  on  the  face  of 
the  argument  it  would  seem  impossible  to  get 
correct  indications  from  tables  of  unweighted  in- 
dex numbers,  in  reality  the  advantage  of  weight- 
ing is  questionable.  In  the  first  place,  it  is 
exceedingly  difficult  to  select  proper  weights,  and 
impracticable  to  apply  them  to  a  long  list  of  arti- 
cles ;  and,  in  the  next  place,  if  the  number  of  arti- 
cles is  large,  the  use  of  weighted  prices  has  little 
influence  on  the  result. 

We  must  notice,  however,  that  the  relative 
quantities  chosen,  at  the  date  when  the  table 
is  first  computed,  may  not  represent  the  relative 
importance  of  the  same  group  of  goods  at  any 
subsequent  date.  Many  articles  are  in  great 

1  Report  on  Imports  and  Exports,  1885,  Table  V. 
235 


MONEY 

demand  to-day  and  almost  out  of  use  to-morrow. 
Their  vogue  depends  upon  the  whim  of  fashion. 
Consumption  changes  its  character.  With  the 
exception  of  a  few  articles  included  among 
the  necessaries  of  life,  there  is  almost  nothing  the 
demand  for  which  may  not  change  very  much, 
between  two  dates  of  computation.  If  the  rela- 
tive values  of  the  commodities  which  enter  in 
to  make  up  the  table  change  during  the  interim, 
the  quantities  exchanged  will  be  different,  and 
the  proportions  in  which  they  should  enter  into 
the  table  of  prices  at  subsequent  dates  should 
change. 

9.  Influence  of  New  Commodities.  — Still  further, 
it  may  be  urged  with  much  force  that  the  useful- 
ness of  the  averages  obtained  from  such  tables  of 
prices  is  impaired  by  the  fact  that  new  articles 
may  come  into  use  between  the  dates  on  which 
averages  are  struck.  Such  articles  must,  of  course, 
be  taken  into  account  if  the  tables  are  to  serve  the 
purpose  for  which  they  are  devised.  This  diffi- 
culty, however,  may  be  overcome  in  a  measure  by 
making  frequent  revisions  of  the  table.  As  Pro- 
fessor Marshall  has  pointed  out,  when  a  new 
article  appears  on  the  market  no  notice  should  be 
taken  of  it,  in  comparing  the  average  of  prices  in 
the  tabular  standard,  at  the  date  of  its  first  appear- 
ance. At  the  next  subsequent  date  of  making  up 
the  table,  however,  the  article  should  be  put  in  the 
list.  The  interim  will  allow  its  price  to  settle 
down  to  a  normal  condition. 

236 


MEASUREMENT  OF  CHANGES  IN  PRICES 

10.  Whether  Wholesale  or  Retail  Prices  furnish 
the  Better  Comparison.  —  In  the  next  place,  it  is 
important  to  know  whether  we  should  use  whole- 
sale or  retail  prices  in  making  our  index  numbers. 
The  choice  depends  on  our  purpose.     If  we  wish 
to  show  simply  and  solely  the  change  in  the  level 
of  prices,  there  is  no  theoretical  objection  to  the 
use  of  wholesale  prices.     If,  however,  we  wish  to 
discover  the  effect  of  changes  in  the  price  level  on 
the  economic  condition  of  a  certain  social  class,  we 
should   use  retail  prices,    because   these   are   the 
prices  that  the  people  pay.     Wholesale  prices  are, 
however,  more  uniform  and   more   easily  gotten. 
They  apply  to  a  larger  area,  and  they  are  more 
sensitive,    more    subject   to   the    breath    of    com- 
petition. 

11.  The  Different  Purposes  of  Tables  of  Prices 
determine  their  Character.  —  There  are  certain  other 
possible  causes  of  error  which  need  careful   con- 
sideration  before   we    can   finally  make    up    our 
minds   concerning   the   usefulness  of   index  num- 
bers.    A  table  may  give  the  same  average  level  of 
prices  at  two  different  times,  although  in  the  mean- 
time there  have  been  many  and  great  variations 
in  the  price  of  the  different  articles,  because  the 
variations  may  have    offset    one    another.      To  a 
person  who  is  interested  in  but  a  few  of  the  com- 
modities in  the  table,  it  is  of  little  interest  or  im- 
portance to  know  that  the  price  level  has  remained 
constant,  while  the  goods  that  he  deals  in  have 
either  fallen  or  risen.      The   importance    of   this 

237 


MONEY 

objection  depends,  again,  on  the  purpose  of  the 
tables  of  prices.  If  the  aim  is  to  show  changes  in 
the  level  of  prices,  the  objection  loses  force ;  for  it 
is  not  claimed  that  the  index  numbers  tell  us  about 
relative  prices,  and  it  is  obvious  that  the  same 
average  may  be  derived  from  many  different 
values  of  the  same  series  of  articles.  If,  however, 
the  tables  are  intended  to  show  changes  in  relative 
welfare  of  different  social  classes,  the  objection  is 
important. 

Even  if  all  the  difficulties  thus  far  mentioned 
could  be  overcome,  the  result  would  be  more  or 
less  misleading,  according  to  the  area  over  which 
the  chosen  prices  prevail.  The  prices  which  one 
is  likely  to  obtain  are  not,  of  course,  universal. 
They  do  not  hold  good  in  all  the  markets  of  the 
world.  The  mean  price  of  the  same  article  may, 
therefore,  be  very  different  in  different  places,  for 
the  same  series  of  dates.  Moreover,  the  mean 
may  be  seriously  affected  by  extreme  variations  of 
prices  in  the  same  locality.  Professor  Marshall 
points  out  that  if  we  take  as  an  index  number  the 
mean  price  of  strawberries  in  May,  June,  and  July, 
we  will  have  an  average  which  is  not  representa- 
tive. It  is  made  up  of  prices  to  which  equal  arith- 
metical weight  is  given,  although  some  of  them  do 
not  apply  to  the  bulk  of  the  supply  of  the  com- 
modity. Strawberries  are  most  plentiful  in  the 
middle  period  of  the  three  months  mentioned. 
At  the  beginning  of  the  season  we  find  them  sell- 
ing at  a  high  price,  soon  there  is  a  considerable 

238 


MEASUREMENT  OF  CHANGES  IN  PRICES 

and  somewhat  sudden  drop  to  a  price  which  varies 
but  little  until  near  the  close  of  the  season,  when 
there  is  again  a  sudden  and  a  large  rise.  If  we 
strike  an  average  giving  equal  weight  to  the  mean 
price  in  May,  June,  and  July,  we  will  get  a  result 
that  is  too  large.  The  price  in  the  middle  of  the 
season  may  apply  to  a  thousand  times  more  berries 
than  the  price  of  early  May,  or  of  late  July.  To 
get  a  correct  mean,  therefore,  in  a  case  like  this, 
we  must  weight  the  price  for. the  middle  of  the 
season.  In  general,  in  forming  our  tables,  we 
must  give  less  weight  to  articles  whose  prices  vary 
very  frequently. 

Whether  or  not  wages  and  rent  in  the  ordinary 
sense,  will  be  included  in  deriving  the  index  num- 
bers, depends  altogether  upon  the  use  to  which 
the  numbers  are  to  be  put.  If  they  are  for  the 
simple  purpose  of  indicating  the  changes  in  the 
general  purchasing  power  of  money,  wages  and 
rent  need  not  be  included,  because  they  are  already 
counted  in  the  prices  of  goods.  If,  however,  we 
are  seeking  light  upon  the  condition  of  wage  re- 
ceivers and  income  receivers,  we  must  include  both 
of  these  items  in  our  table. 

12.  The  Services  of  Tables  of  Prices.  —  After  all 
these  things  have  been  attended  to,  all  causes  of 
error  eliminated,  or  corrected  as  far  as  possible, 
and  the  table  constructed  in  the  way  best  suited 
to  the  purpose,  of  what  value  is  the  result  ?  It 
certainly  cannot  be  regarded  as  very  accurate. 
Yet  it  serves  very  well  the  purpose  of  students  of 

239 


MONEY 

economic  history  to  show  changes  through  long 
periods,  in  the  general  purchasing  power  of  money, 
and  in  economic  conditions  at  different  times. 
The  more  numerous  the  commodities  represented 
in  the  table,  the  more  closely,  as  has  already  been 
remarked,  will  the  index  numbers  do  this,  provided 
the  other  conditions  necessary  remain  the  same. 
The  result,  however,  will  be  of  little  importance 
to  any  individual  or,  perhaps,  to  any  class.  Like 
the  ready-made  suit  of  clothes,  it  may  fit  the 
average  man,  but  the  average  man  is  nowhere  to 
be  found.  It  becomes  of  more  importance  to  an 
individual,  or  class,  in  proportion  as  the  list  of 
things  included  conforms  to  a  list  which  the  in- 
dividual or  the  class  buys  or  sells.  It  has  been 
remarked  several  times  that  the  selection  of  articles 
for  a  table  of  prices,  and  the  method  of  using  the 
data  for  deriving  a  set  of  index  numbers,  should 
be  determined  by  the  purpose  in  view.  Hence,  as 
Professor  Edgeworth  remarks,  "  there  are  there- 
fore many  methods  —  not  one  method  —  of  meas- 
uring and  ascertaining  variations  in  the  value  of 
money.  The  path  which  we  have  to  investigate 
has  many  bifurcations.  To  decide  at  each  turn 
which  is  the  right  direction  is  either  impossible  or 
at  least  presumptuous.  It  is  impossible  when  both 
ways  are  right,  directed  to  different,  but  equally 
legitimate,  ends."1  The  purpose  may  be  (i)  to 
find  for  the  use  of  the  student  of  economic  history 
a  rough  measure  of  changes  in  welfare  from  time 

1  Report  of  the  Brit.  Assoc.  for  Adv.  of  Sci.,  1887,  p.  259. 
240 


MEASUREMENT  OF  CHANGES  IN  PRICES 

to  time,  as  shown  by  changes  in  the  value  of  money; 
(2)  to  furnish  a  standard  to  keep  general  prices 
steady  in  order  to  keep  trade  stable ;  (3)  to  furnish 
a  basis  for  the  equitable  discharge  of  long-time 
debts ;  and  (4)  to  supply  a  means  for  measuring 
the  purchasing  power  of  wages  and  incomes  in 
different  places  or  people.  We  can  form  tables 
which  will  serve  very  well  each  one  of  these  pur- 
poses, with  much  more  ease,  and  much  more  accu- 
racy, than  we  can  form  a  table  that  will  serve  them 
all  at  once.  As  Professor  Taussig  puts  it,  "  Pro- 
ceeding from  the  social  point  of  view,  it  might  be 
possible  from  a  given  set  of  figures,  to  conclude 
that  the  expense  of  living  for  the  workingman  had 
risen ;  while  yet  from  the  simple  monetary  point 
of  view,  the  same  figures  might  make  it  clear  that 
prices  had  fallen."  1 

For  the  first  and  second  purposes  enumerated, 
all  vendibles  ought  properly  to  be  included.  As 
this  is  impossible,  the  tables  should  be  as  ex- 
tensive as  practicable,  and  should  contain  not 
only  material  goods,  but  wages  of  labor  and  in- 
comes. For  the  third  purpose,  sufficient  accuracy 
would  be  obtained  by  choosing  for  our  list  the 
articles  common  to  the  demand  of  both  creditor 
and  debtor.  Perfect  coincidence  is  of  course  un- 
attainable, except  in  peculiar  cases.  For  the 
fourth  purpose,  it  would  be  best  to  select  a  "  cer- 
tain region  of  industry  and  get  an  index  number 
from  its  products  which  indicates  changes  likely 

1  Yale  Rev.,  November,  1893,  P-  235- 
R  241 


MONEY 

to  become  general." 1  We  would  need  as  many 
tables  as  there  are  classes  who  have  money  to 
spend.  The  more  exactly  the  articles  in  the  table 
are  those  consumed  by  a  special  social  class,  the 
more  accurately,  as  has  been  said,  does  the  result 
represent  changes  in  the  value  of  money  for  the 
members  of  that  class.  We  might,  therefore,  con- 
struct a  table  of  index  numbers  for  each  social 
class,  according  to  the  different  kinds  and  amounts 
of  wealth  that  its  members  consume.  For  the 
entrepreneurs,  or  employing  class,  such  a  table 
should  include  the  price  of  labor.  For  wage- 
earners  considered  as  consumers,  the  things  they 
most  largely  consume  should  make  up  the  table ; 
while  as  producers  the  varying  value  of  money 
for  them  should  be  measured  by  index  numbers  of 
wages.  For  the  wealthier  classes  of  society,  the 
list  selected  should  contain  the  necessaries  of  life, 
as  before ;  but  should  include  many  things  which 
are  beyond  the  reach  of  the  mass  of  the  people, 
and  should  also  include  wages  paid  for  personal 
services.  Other  forms  of  a  table  could  be  sug- 
gested, but  these  are  sufficient  to  indicate  the 
variety  that  is  possible. 

13.   The  Best  Kind   of  Table  for  General  Pur- 
poses. —  For  general  purposes,  however,  changes 
in  the  value  of  money  can  be  fairly  shown  by  a 
table  constructed  of  the  prices  of  articles  of  gen- 
eral consumption.     It  is  true,  as  Professor  Foxwell 
has  urged,  that  the  "  consumer  is  not  every  one  " ; 
1  Report  of  the  Brit.  Assoc.  for  Adv.  of  Sci.,  1887,  p.  257. 
242 


but  it  is  also  true  that  every  one  is  a  consumer.  In 
constructing  a  table  on  the  basis  of  quantities  con- 
sumed, raw  materials  should  be  excluded,  except- 
ing in  those  cases  where  we  cannot  get  accurate 
prices  of  the  finished  products.  The  question  of 
the  choice  between  wholesale  and  retail  prices  is 
of  great  importance  here.  Consumers,  as  con- 
sumers, usually  pay  retail  prices  ;  on  the  other 
hand,  these  are  subject  to  much  friction,  and  show 
innumerable  local  variations.  Wholesale  prices, 
as  has  been  pointed  out,  are  easier  to  get  and 
usually  differ  less  as  between  different  places  ;  yet 
they  may  not  be  accurate,  because  the  producer 
may  be  obtaining  the  same  price  for  an  article  at 
two  different  times,  although  the  lessened  cost  of 
transportation  may  make  the  quoted  market  price 
lower  at  the  second  date  than  it  was  at  the  pre- 
ceding one.  Now,  it  is  market  prices  which  are 
used  in  making  up  index  numbers.  On  the  whole, 
however,  in  this  special  table,  as  in  a  table  of  a 
more  general  character,  we  are  likely  to  get  into 
less  trouble  by  using  wholesale  instead  of  retail 
prices.  As  to  the  relative  weights  to  be  assigned 
the  different  articles,  the  relative  quantities  pro- 
duced at  the  given  dates  ma'y  well  be  used  ;  or  the 
relative  quantities  marketed  or  consumed  at  the 
given  dates,  either  by  consumers  in  general,  or  by 
the  working  classes  as  shown  by  their  budget  oi 
expenses.  If  we  use  the  latter  method  of  weight- 
ing, we  run  across  another  source  of  error  in  the 
possible  inaccuracy  of  the  budgets. 

243 


MONEY 

In  this  consumption  standard  the  table  of  wages 
of  labor  employed  in  producing  commodities,  as 
distinguished  from  the  labor  expended  in  personal 
services,  should  not  be  included.  For  the  wages 
of  the  former  have  already  been  allowed  for  in  the 
prices  of  the  goods  produced,  and  it  is  necessary 
in  calculations  of  this  kind  that  the  various  obser- 
vations made,  or  statistics  obtained,  should  be  as 
far  as  possible  independent  of  one  another.  More- 
over, what  we  want  to  know  from  this  table  is  the 
change  in  the  power  over  goods  due  to  changes  in 
the  value  of  money.  We  should  defeat  our  pur- 
pose to  a  certain  extent,  so  far  as  the  inquiry  re- 
lates to  the  laborer,  if  we  included  in  our  table 
records  of  the  wages  which  he  gets.  Wages  paid 
for  personal  services,  however,  are  on  a  different 
footing.  They  are  not  represented  in  the  prices 
of  goods,  and  they  represent  expenditures  by  an- 
other social  class.  As  to  rent,  in  the  economic 
sense,  it  should  not  be  included  in  the  tables.  For 
it  represents  a  differential  advantage,  and  does 
not  affect  the  prices  of  commodities.  Rent  in  the 
common  sense,  such  as  house  rent,  as  distinguished 
from  rent  of  location,  may,  however,  be  included 
because  it  is  one  of  th*e  ordinary  expenses  of  the 
people. 

14.  The  Similarity  of  Results  in  Different  Tables. 
—  At  first  thought  it  seems  a  surprising  fact  that 
computations  of  price  changes  made  in  the  crudest 
way  yield  results  of  the  same  general  character  as 
are  yielded  by  calculations  into  which  enters  every 

244 


MEASUREMENT  OF  CHANGES  IN  PRICES 

refinement  of  mathematics  for  the  correction  of  the 
various  errors  that  have  been  described.  They 
all  show,  for  example,  that  the  prices  of  goods, 
measured  in  gold,  rose  from  the  period  of  1845— 
1850  to  1873,  and  fell  from  that  date  until  within 
the  past  half-dozen  years.  The  agreement  is  not 
so  surprising,  however,  when  we  recall  the  large 
number  of  possible  sources  of  error.  As  has  been 
remarked  already,  to  seek  refinement  of  method 
with  data  that  can  never  be  accurate  is  useless  labor. 
15.  The  Table  of  the  London  "  Economist."  —  Dif- 
ferent tables  of  index  numbers  have  been  con- 
structed, but  the  best-known  examples  are  those 
of  the  London  Economist,  Jevons,  Soetbeer,  Sauer- 
beck, and  Falkner.  The  method  of  the  London 
Economist  begun  by  Mr.  Newmarch  1  is,  perhaps, 
the  simplest  and  crudest.  It  contains  22  articles, 
the  simple  average  of  whose  prices  for  six  years, 
from  1845  to  1850,  constitutes  the  base.  The  price 
of  each  article  was  noted  on  January  I  and  July 
i.  The  mean  of  these  was  taken  for  the  price 
at  the  starting-point,  and  called  100.  As  there  are 
22  articles,  the  index  number  for  all  is  2200.  Each 
year  thereafter  the  percentage  of  rise  or  fall  of 
each  article  is  added  to,  or  taken  from,  the  original 
100.  The  sum  is  found,  and  according  as  this  sum 
varies  from  the  original  2200,  so  has  the  price  level 

1  See  the  Economist,  March,  1864.  The  articles  are  coffee, 
sugar,  tea,  tobacco,  butchers'  meat,  wheat,  cotton,  wool,  raw  silk, 
flax  and  hemp,  indigo,  oils,  timber,  tallow,  leather,  cotton  cloth, 
copper,  iron,  lead,  tin,  Pernambuco  cotton,  and  cotton  yarn. 

245 


MONEY 


varied.     The   Economist's   table,  with  the  figures 
for  January  I  only,  is  as  follows  :  — 

THE   "ECONOMIST'S"   TABLE1 


YEAR 

TOTAL 
OF  ALL 
ARTICLES 

AVERAGE 
FOR  ALL 
ARTICLES 

YEAR 

TOTAL 
OF  ALL 
ARTICLES 

AVERAGE 
FOR  ALL 
ARTICLES 

1845-50 

2.2OO 

100 

1882 

2,435 

III 

1851 

2,293 

104 

1883 

2,342 

1  06 

1858 

2,6l2 

119 

1884 

2,221 

IOI 

1861 

2,727 

124 

1885 

2,098 

95 

1862 

2,878 

131 

1886 

2,023 

92 

1863 

3-492 

159 

1887 

2,059 

94 

1864 

3,787 

172 

1888 

2,230 

IOI 

1865 

3,575 

163 

1889 

2,187 

99 

1866 

3,564 

162 

1890 

2,236 

1  02 

1867 

3,024 

137 

1891 

2,240 

IO2 

1868 

2,682 

122 

1892 

2,133 

97 

1869 

2,666 

121 

1893 

2,  1  2O 

96 

1870 

2,689 

122 

1894 

2,082 

95 

1871 

2,590 

118 

1895 

1,923 

87 

1872 

2,835 

129 

1896 

i,999 

9i 

1873 

2,947 

134 

1897 

1,950 

88 

1874 

2,891 

131 

1898 

1,890 

86 

i875 

2,778 

126 

1899 

1,918 

87 

1876 

2,711 

I23 

1900 

2,145 

97 

1877 

2,715 

123 

1901 

2,126 

97 

1878 

2,529 

"5 

1902 

1,948 

89 

1879 

2,225 

101 

1903 

2,003 

9» 

1880 

2,538 

"5 

1904 

2,197 

99 

1881 

2,376 

1  08 

This  table  is  crude,  its  list  of  articles  is  too  short 
to  be  representative,  and  the  small  number  gives 
undue  weight  to  a  change  in  the  price  of  a  single 
one,  since  the  prices  are  not  weighted.  Moreover, 

1  The  Economist's  Monthly  Supplements. 
246 


MEASUREMENT  OF  CHANGES  IN  PRICES 

one  article,  cotton,  appears  too  often ;  and  the 
choice  of  the  prices  of  two  single  days,  January 
i  and  July  i,  to  represent  the  price  of  the  year, 
is  likely  to  cause  large  error. 

16.  The  Work  of  Jevons  on  Index  Numbers.  - 
Professor   Jevons   it  was  who   first   attacked   the 
study  of   price   changes  in  a  thoroughgoing  and 
masterly  manner.     His    first   publication 1  on   the 
subject,  in  which  he  used  39  articles,  appeared  in 
1863.     He  found  the  arithmetical  average  of  the 
prices  of  each  of  these  for  the  six  years  from  1845 
to  1850,  and  used  this  as  the  base.     To  get  his 
yearly  average  price  for  each  article,  he  took  the 
arithmetical  average  of  the  mean  monthly  prices  of 
the  highest  and  lowest  grade  of  each.     He  then  di- 
vided this  annual  average  by  the  basic  average.   The 
resulting  percentages  showed  the  price   changes. 
He  manipulated  his  data  in  other  ways  and  used 
certain  refinements  of  mathematical  calculations,  as 
the  geometric  mean  and  logarithms,  but  they  do  not 
really  add  anything  to  the  value  of  the  result. 

17.  Soetbeer's  Tables.  —  Soetbeer  chose  114  arti- 
cles, the  prices  of   100  of  which  he  took  from  the 
Hamburg  market,  and  those  of  the  other   14  from 
the  English  market.2 

1  "  A  Serious  Fall  in  the  Value  of  Gold  ascertained  and  its  Social 
Effects   set    Forth."      See    his  "  Investigations    in    Currency  and 
Finance." 

2  See  his    "  Materialen   zur   Erlaiiterung  und  Beurtheilung  der 
Wirthschaftlichen  Fdelmetallverhaltnisse  und  der  \Vahrungsfrage," 
(transl.   in    "  Bimetallism    in    Europe,"    United  States  Exec.  Doc. 
No.  34,  5Oth  Congress,  ist  Sess.,  1887). 

247 


MONEY 


SOETBEER'S   TABLE   OF   RELATIVE   PRICES1 
1847-1850  =  100 


YEAR 

I 
AGRICUL- 
TURAL 

II 
ANIMAL 

III 

TROPICAL, 

ETC. 

IV 

EAST  INDIA 
GOODS,  ETC. 

V 
MINERAL 

1847-1850 

100.00 

100.00 

IOO.OO 

IOO.OO 

IOO.OO 

1851 

99.00 

110.38 

90.00 

99-94 

95-7° 

1852 

I  T  0.  7  1 

106.68 

95-33 

99-95 

95.76 

1853 

128.18 

114.94 

24.78 

115.28 

09.24 

1854 

150.49 

121.  12 

12.91 

118.17 

15-95 

1855 

158.82 

123-54 

42.03 

121.  02 

19.10 

1851-1855 

129.99 

114.79 

10.43 

II0.97 

07.03 

1856 

149.03 

127.61 

55-95 

123.95 

16.65 

1857 

138.11 

140.18 

69-32 

40.32 

24.58 

1858 

119.92 

127.02 

20.69 

12.76 

09.04 

1859 

119.48 

130.69 

13.40 

15-74 

08.57 

1860 

!33-75 

133-75 

20.36 

2O.28 

08.66 

1856-1860 

131.84 

I32-3I 

34-72 

22.  6l 

13-59 

1861 

131.46 

124.79 

22.08 

17.19 

02.40 

1862 

126.80 

127.19 

13-93 

17.28 

01.88 

1863 

I2O.I2 

124.12 

14-97 

16.87 

02.92 

1864 

117.89 

129.21 

09.41 

25-74 

04-53 

1865 

126.48 

135.23 

14.01 

46.11 

98.93 

1861-1865 

124.46 

128.24 

14-13 

l8.64 

IO2.II 

1866 

137.64 

135.64 

26.30 

17.00 

96.54 

1867 

146.38 

132.68 

26.44 

14.35 

93.28 

1868 

141.59 

I33.48 

20.75 

16.75 

91.76 

1869 

132.40 

I43.25 

15.58 

122.  IO 

96.33 

1870 

131.23 

13902 

18.57 

120.56 

99.68 

1866-1870 

'37-74 

136.35 

21.54 

Il8.32 

95.47 

1871 

144.76 

144.14 

22.99 

20.22 

01.85 

1872 

144.17 

155.82 

25-36 

30.25 

21.63 

1873 

146.21 

156.72 

32-!5 

34.32 

40.60 

1874 

150.99 

I57.76 

45.02 

36.74 

16.70 

1875 

I33.l6 

158.59 

31-35 

32.11 

07.49 

i87i-I87s 

144.90 

154-57 

3'-5° 

30.72 

16.90 

1876 

141.06 

155-79 

28.69 

29.74 

06.27 

i877 

145-34 

152.51 

40.55 

30.29 

98.87 

1878 

132.50 

141.53 

34-34 

25.6l 

94.14 

1879 

132.92 

137.60 

39-  I0 

23-34 

84.28 

1880 

138.11 

147.30 

54.65 

22.92 

88.33 

1876-1880 

138.12 

146.76 

38.91 

26.38 

94-35 

1881 

137-5° 

151.21 

46.57 

22.60 

84.87 

1882 

138.45 

I55.I7 

39-23 

22.47 

86.99 

1883 

M3-33 

156.40 

42.38 

20.17 

82.93 

1884 

123.85 

150.26 

20.16 

17.90 

78.69 

1885 

110.75 

J40.45 

23.78 

16.39 

74.23 

1881-1885 

130.77 

150.65 

34-41 

19.91 

81.55 

1886 

101.31 

'33-53 

22.44 

15-45 

70.52 

i887 

96.28 

129.93 

21.  8l 

16.59 

72.50 

1888 

98.  :8 

128.97 

20.09 

16.41 

75-57 

1889 

102.06 

130-95 

27.57 

18.82 

78.55 

1890 

107.53 

129.85 

38.61 

19-35 

83.54 

1886-1890 

101.07 

130.64 

26.10 

17.32 

76.13 

1891 

119.88 

131.66 

39.99 

13.56 

84.72 

1  U.  S.  Sen.  (Aldrich)  Report  on  \Vholesale  Prices,  Vol.  I.,  p.  294. 
248 


MEASUREMENT  OF   CHANGES  IN  PRICES 


SOETBEER'S   TABLE   OF   RELATIVE   PRICES1 

1847-1850  =  100 


YEAR 

VI 

TEXTILE 
MATERIALS 

VII 

DIVERS 

VIII 

BRITISH 
EXPORTS 

I-VIII 

TOTAL  OF  114 
ARTICLES 

1847-1850 

oo.oo 

oo.oo 

100.00 

oo.oo 

1851 

04.39 

03.98 

97.98 

00.21 

1852 

05.01 

95-09 

95.98 

01.69 

1853 

01-43 

05-17 

100.61 

13.69 

1854 

11.64 

19.44 

99-53 

21.25 

1855 

03-58 

09.63 

98.27 

24.23 

1851-1855 

05.20 

06.65 

98.47 

12.22 

1856 

00.02 

00.50 

98.50 

23.27 

1857 

12.  l8 

08.  01 

01.25 

3O.II 

1858 

03-59 

99.70 

00.91 

I3-52 

1859 

04.69 

15-57 

05.77 

16.34 

1860 

08.74 

16.83 

05,60 

20.98 

1856-1860 

07.12 

08.  21 

02.41 

2O.gI 

i86x 

10.85 

19.65 

05.84 

iS.IO 

1862 

24-31 

56-99 

14.22 

22.65 

1863 

51.84 

61.36 

33-45 

25-49 

1864 

54.26 

62.58 

46.53 

29.28 

1865 

17.80 

2  1.  06 

37.80 

22.63 

1861-1865 

31.83 

44-33 

27.56 

23.59 

1866 

34-94 

11.30 

40.36 

25.85 

1867 

30-31 

08.13 

33-91 

24.44 

1868 

27.18 

01.25 

27.56 

21.99 

1869 

30.52 

98.17 

28.15 

23.38 

1870 

22.87 

II.  21 

22.68 

22.87 

1866-1870 

29.17 

05.90 

30.55 

23-57 

1871 

19.23 

17.48 

22.64 

27.03 

1872 

22.79 

28.54 

30.07 

35.62 

1873 

19.58 

19.14 

28.52 

38.28 

1874 

12.21 

26.06 

36.20 

1875 

11.47 

98.74 

24.96 

29.85 

1871-1875 

17.17 

14.98 

26.44 

33.29 

1876 

05-54 

01.78 

19.23 

28.33 

1877 

08.33 

99.80 

14.04 

27.70 

1878 

02-33 

97.24 

11.03 

2O.6O 

1879 

98.76 

90.21 

05.93 

17.10 

1880 

96.72 

95-23 

08.15 

2I.8g 

1876-1880 

102.33 

96.79 

11.70 

23.07 

1881 

99.29 

94.89 

03.03 

21.07 

1882 

95.10 

99.10 

04.72 

22.14 

1883 

95.93 

95.38 

04.72 

22.24 

1884 

97.02 

84.82 

03.36 

14.25 

1885 

95.89 

8i.3S 

00.48 

08.72 

1881-1885 

96.65 

91.11 

03.28 

17.68 

1886 

89.76 

78.75 

97-03 

03.99 

1887 

81.42 

77-3° 

95.98 

02.02 

1888 

82.17 

74-31 

94.91 

O2.O4 

1889 

89.05 

86.41 

96.60 

06.13 

1890 

81.92 

91.70 

94.90 

08.13 

1886-1890 

84.86 

81.69 

95.88 

04.46 

1891 

80.40 

85.06 

95-11 

09.19 

U.  S.  Sen.  (Aldrich)  Report  on  Wholesale  Prices,  Vol.  I.,  p.  294. 
249 


MONEY 

His  tables,  which  are  probably  the  best  we  have, 
begin  with  1847  anc^  extend  to  1888,  the  period  for 
which  data  were  collected  by  the  Hamburg  Bureau 
of  Trade  Statistics.  Dr.  Soetbeer  continued  his 
table  from  other  sources,  from  1886  to  iScp.1  He 
used  the  simple  arithmetical  average,  taking  as 
his  base  the  average  of  the  period  1847-1850.  He 
grouped  his  articles  into  eight  classes,  according 
to  their  character :  agricultural,  animal,  tropical 
and  kindred  products,  East  India  goods,  mineral, 
textiles,  sundry,  and  British  exports.  His  table  is 
on  pages  248,  249. 

18.  Sauerbeck's  Tables.  —  Sauerbeck's  table  of 
English  prices  is,  perhaps,  the  most  generally 
quoted.  He  uses  the  unweighted  arithmetical 
average  and  takes  average  prices  for  1867-1877  as 
his  base.  Thirty-seven  different  articles  are  used, 
but  several  of  them  are  introduced  more  than  once 
in  different  grades,  so  that  a  total  of  fifty-six  items 
appears.  They  are  all  raw  materials.  This  last 
fact  is,  of  course,  a  defect.  So,  too,  are  the  small 
number  of  articles  used,  the  absence  of  weights, 
the  admitted  inaccuracy  of  some  of  the  price  quo- 
tations, and  the  occasional  use  of  actual  single 
prices  instead  of  averages.  Sauerbeck's  table  is 
as  follows  :z  — 

1  Jahrbuch  fur  Nationaloekonomie  und  Statistik,  III.,  F.  B.  III., 
pp.  588  ff. 

2  United  States  Senate  (Aldrich)  Report  on  Wholesale  Prices, 
Vol.  I.,  p.  247;  Journ.  Royal  Statis.  Soc.,  1886,  1893,  1903. 


250 


MEASUREMENT  OF   CHANGES  IN  PRICES 


SAUERBECK'S   INDEX  NUMBERS 

GROUPS  OF  ARTICLES  AND  TOTALS  1867-1877  =  100 


a 
| 

VEGETABLE  FOOD 

(CORN,  ETC.) 

ANIMAL  FOOD 
(MEAT,  ETC.) 

III 

til 

t. 
O 

u  < 

sTc-i 

gg 

0 
o 
o 

H 

MINERALS 

TEXTILES 

K  * 

TOTAL  MATERIALS 

J 

H 

O 
K 

O 

1846 

106 

81 

98 

95 

92 

77 

86 

85 

89 

I847 

129 

88 

87 

105 

94 

78 

86 

86 

95 

1848 

92 

83 

69 

84 

78 

64 

77 

73 

78 

1849 

79 

71 

77 

76 

77 

67 

75 

73 

74 

1850 

74 

67 

87 

75 

77 

78 

80 

78 

77 

1851 

73 

68 

84 

74 

75 

75 

79 

76 

75 

1852 

80 

69 

75 

75 

80 

78 

84 

81 

78 

1853 

IOO 

82 

87 

9i 

105 

87 

IOI 

97 

95 

1854 

1  20 

87 

85 

IOI 

"5 

88 

109 

104 

IO2 

I8S5 

1  20 

87 

89 

IOI 

109 

84 

109 

IOI 

IOI 

1856 

109 

88 

97 

99 

IIO 

89 

109 

IO2 

IOI 

1857 

I05 

89 

119 

IO2 

108 

92 

119 

I07 

105 

1858 

87 

83 

97 

88 

96 

84 

102 

94 

91 

I8S9 

85 

85 

102 

89 

98 

88 

I07 

98 

94 

1860 

99 

Q  I 

I07 

98 

97 

90 

III 

IOO 

99 

1861 

102 

Q  J 

96 

97 

9  1 

92 

IO9 

99 

98 

1862 

98 

86 

98 

94 

O  I 

123 

106 

107 

IOI 

1863 

87 

85 

99 

89 

93 

149 

IOI 

"5 

103 

1864 

79 

89 

106 

88 

96 

162 

98 

119 

105 

1865 

84 

97 

97 

9i 

9i 

134 

97 

1  08 

IOI 

1866 

95 

96 

94 

95 

9i 

130 

99 

107 

102 

1867 

"5 

89 

94 

IOI 

87 

no 

IOO 

IOO 

IOO 

1868 

"3 

88 

96 

IOO 

85 

1  06 

102 

99 

99 

1869 

91 

96 

98 

94 

89 

109 

IOO 

IOO 

98 

1870 

88 

98 

95 

93 

89 

1  06 

99 

99 

96 

1871 

94 

IOO 

IOO 

98 

93 

103 

105 

IOI 

IOO 

1872 

IOI 

IOI 

104 

102 

127 

114 

108 

"5 

109 

1873 

1  06 

109 

1  06 

I07 

141 

103 

1  06 

114 

III 

1874 

105   103 

105 

104 

116 

92 

96 

IOO 

IO2 

251 


MONEY 


SAUERBECK'S   INDEX   NUMBERS 
GROUPS  OF  ARTICLES  AND  TOTALS  1867-1877  =  100 


M 

a 

a 
o 
o 
[i,^ 

W  u 

5  H 

<  . 

a  g 

O  o 

a  ~, 
o  • 

£5 
<  5 

S 

SUGAR,  COFFEE, 
AND  TEA 

Q 

0 

£ 

j 

1 

MINERALS 

TEXTILES 

j 

>  z 

Q  H 

TOTAL  MATERIALS 

GRAND  TOTAL 

1875 

93 

1  08 

IOO 

IOO 

IOI 

88 

92 

93 

96 

1876 

92 

1  08 

98 

99 

90 

85 

95 

9i 

95 

I877 

IOO 

IOI 

103 

IOI 

84 

85 

94 

89 

94 

1878 

95 

IOI 

90 

96 

74 

78 

88 

81 

87 

1879 

87 

94 

87 

90 

73 

74 

85 

78 

83 

1880 

89 

IOI 

88 

94 

79 

81 

89 

84 

88 

1881 

84 

IOI 

84 

9i 

77 

77 

86 

80 

85 

1882 

84 

104 

76 

89 

79 

73 

85 

80 

84 

1883 

82 

103 

77 

89 

76 

70 

84 

77 

82 

1884 

71 

97 

63 

79 

68 

68 

81 

73 

76 

1885 

68 

88 

63 

74 

66 

65 

76 

70 

72 

1886 

65 

87 

60 

72 

67 

63 

69 

67 

69 

1887 

64 

79 

67 

70 

69 

65 

67 

67 

68 

1888 

67 

82 

65 

72 

78 

64 

67 

69 

70 

1889 

65 

86 

75 

75 

75 

70 

68 

70 

72 

1890 

65 

82 

70 

73 

80 

66 

69 

71 

72 

1891 

75 

81 

71 

77 

76 

59 

69 

68 

72 

1892 

65 

84 

69 

73 

71 

57 

67 

65 

68 

1893 

59 

85 

75 

72 

68 

59 

68 

65 

68 

1894 

55 

80 

65 

66 

64 

53 

64 

60 

63 

1895 

54 

78 

62 

64 

62 

S2 

65 

60 

62 

1896 

53 

73 

59 

62 

63 

54 

63 

60 

61 

1897 

60 

79 

52 

65 

66 

51 

62 

59 

62 

1898 

67 

77 

51 

68 

7° 

51 

63 

61 

64 

1899 

60 

79 

53 

65 

92 

58 

65 

70 

68 

1900 

62 

85 

54 

69 

1  08 

66 

71 

80 

75 

1901 

62 

85 

46 

67 

89 

60 

71 

72 

70 

1902 

63 

87 

41 

67 

82 

61 

71 

71 

69 

252 


MEASUREMENT  OF  CHANGES  IN  PRICES 

19.  Falkner's  Tables.  —  The  table  of  prices  and 
index  numbers1  which  for  extensiveness  takes  pre- 
cedence of  all  others,  is  that  compiled  by  Professor 
R.  P.  Falkner,  formerly  of  the  University  of  Penn- 
sylvania. Professor  Falkner  gathered  together 
continuous  lists  of  prices  for  90  articles  for  the 
50  years  preceding  1891  ;  and  for  223  articles  for 
the  30  years  preceding  that  date.  Of  the  223 
quotations,  81  were  for  different  varieties  of  the 
same  article.  The  basic  year  is  1860,  and  its 
prices,  on  the  first  of  January,  are  called  100. 
Many  of  the  price  quotations  are  not  aver- 
ages, but  prices  on  selected  dates.  The  index 
numbers  were  computed  both  from  unweighted 
prices  and  from  prices  weighted  according  to  the 
importance  of  the  articles  in  the  budgets  of  ex- 
penses of  2561  families  of  workingmen  in  the 
United  States.  Such  a  method  of  weighting  is 
excellent  for  tables  designed  to  show  changes  in 
the  economic  condition  of  the  class  whose  expen- 
diture the  budgets  represent ;  but  the  results  can 
show  changes  in  the  command  of  money  over 
goods  in  general  only  so  far  as  the  articles  in  the 
budgets  enter  into  the  expenditure  of  all  classes, 
and  that,  too,  in  the  proportions  in  which  they  are 
weighted.  Budgets  in  whose  accuracy  and  com- 
pleteness confidence  can  be  had  are  difficult  to 
get,  and  introduce  into  index  numbers  errors  pecul- 
iar to  themselves.  In  Falkner's  tables  somewhat 

1  United  States  Senate  (Aldrich)  Report  on  Wholesale  Prices, 
etc. 

253 


MONEY 


sPs'sg 
-* .  — 

y  H  M  H  ™ 


^H?££ 

~*  -r  a 


*o  \o  q  ox  ^  M  vq  vq 


>ioroqoqLoq>JOpiqN  co^q 
to  p!  vd  co  tv.  co  N.CO  d  w  o  V 

uo*1-COCOCOCOCI    f-t    *-i    O    CT^ 


^o  r^oo  o  o  n  o*  co  "f 
COCOCO3OOOOOOOOOCO  cib  ob"cjb"db  ob  66  ( 


ICjOOOCOOOOOCJOOOOOOOOO 


t>.od  d  rj- LOOO  LO  lood  rn  d\cd  tx  10  in  ON  N  -f  co  ci  O  *f  't-  oi  ts  N 
O  CJ»  OOO  oo  CO   O  C\00  oooo   C7NONO   OOi-*   MM   O   O   O\O   rotten 


,  W  COoO  M  t^s  Cx  O  O^'O  w  w)  "t1  "t"  ^O  *-O'O  M  O  O  ONOO  M  ^  CN. 
CO  ON  C>  N  \O  O  N  CO  d"  OvOO  CO  CO'O*  CO  Q  d\  ?i  Q  lO  M"  N  C>  O 

i  o^oo  oo  CT\  0s*  CT\  cr^co  OS^CT\OOOO  o  oo  ooo  01  ^  c> 


C    «    N    CO  -f  ' 


254 


MEASUREMENT  OF   CHANGES  IN  PRICES 


less  than  70  per  cent,  of  the  total  expenditure 
of  the  social  class  considered  was  represented.  Of 
course  the  prices  were  for  the  United  States,  and 
tables  were  made  both  of  retail  and  of  wholesale 
prices.  These  tables  carried  the  prices  down  to 
1891.  In  1900  Professor  Falkner  prepared  a 
second  table  of  wholesale  prices  from  1890  to 
1900,  which  is  substantially  a  continuation  of  his 
previous  table,  although  in  a  somewhat  different 
form  and  for  a  fewer  number  of  articles.  Ninety- 
nine  series  of  prices  were  used  in  the  second 
tables,  and  the  base  used  was  the  average  of  nine 
quarterly  prices  from  January  i,  1890,  to  Janu- 
ary i,  1892.  Falkner's  table  is  on  page  254. 

Professor  Falkner's  supplementary  table  gives 
average  prices  for  each  quarter,  from  January, 
1890,  to  July,  1899.  The  January  figures2  are  as 
follows :  — 


YEAR 

ALL 
ARTICLES 

YEAR 

ALL 
ARTICLES 

1890  

IO2.O 

189;. 

84.  7 

1891  

100  6 

1896  

8c;  2 

1892  

06.  s 

1897. 

82  o 

l8Q3  . 

Q7.2 

1898  

8?    7 

I8Q4.     . 

89.6 

i8qo  . 

86.5 

A  comparison  of  all   these  tables  shows,  what 
has    been   already   urged,   that   the   same   general 

1  United  States  Senate  (Aldrich)  Report,  etc.,  Vol.  I. 

2  Bulletin  of  the   United  States  Department  of  Labor,  No.  27, 
March,  1900,  p.  263. 

255 


MONEY 

conclusions  are  reached  by  all  the  methods  al- 
lowed, so  that  the  labor  involved  in  mathematical 
niceties  is  hardly  worth  while. 

20.  Other  Tables  of  Prices.  —  The  tables  men- 
tioned are  by  no  means  the  only  ones  that  have 
been  compiled.     Among  others  which  are  worthy 
of    mention    are    the    English     tables    of     Rice 
Vaughan,  who  compared  the  prices  of  1650  with 
those  of  1352;  of  Bishop  Fleetwood  in   1707;  of 
R.  H.  I.  Palgrave,  and  Mulhall ;  those  of  the  Ger- 
man writers  Laspeyres,  1831-1863,  Paasche,  1863- 
1872,   continuing    the    work    of    Laspeyres;    and 
Conrad ;    the    French    table   of    De    Foville,  who 
compiled  a  table  of  French  prices  of  imports  and 
exports,  1847-1880;  and  the  tables  of  the  United 
States  Department  of  Labor.1 

21.  Other  Methods  of  Measuring  Price  Changes.  — 
Other    methods    than   the  use  of   index   numbers 
have  been  suggested  for  measuring  variations  in 
the  value  of  money.     Two  or  three  of  them  are 
important  enough  to  deserve  mention.     Dr.  Dro- 
brisch  has  suggested 2  a  comparison  of  the  values 
at  different  epochs  of  an  average   100  weight  of 
goods.     Of  course,  there  is  no  such  thing  as  an 
average   100  weight  of  goods,  so  that  the  method 
is  a  purely  fanciful  one. 

Professor  Newcomb    has    proposed   to  measure 
changes  in  the  value  of  gold  by  noting  the  change 

1  Bulletin  of  the  United  States  Department  of  Labor,  March, 
1902. 

2  See  Report  of  the  Brit.  Assoc.  for  Adv.  of  Sci.,  1887,  p.  265. 

256 


MEASUREMENT  OF  CHANGES  IN  PRICES 

in  the  value  of  the  product  of  an  average  indi- 
vidual worker  per  unit  of  time.  It  is  easy  to 
measure  an  electrical  current,  or  a  head  of  water, 
by  noting  changes  in  the  amount  of  work  done 
under  fixed  conditions ;  but  we  cannot  fix  the  con- 
ditions of  individual  character.  There  is  no  aver- 
age individual,  and  if  there  were,  the  value  of  his 
product  would  be  one  of  the  factors  entering  in  to 
cause  variations  in  the  value  of  gold. 

Professor  Nicholson  has  suggested  a  somewhat 
elaborate  method,  which  takes  account  theoreti- 
cally of  all  things  bought  and  sold.  It  is  briefly 
as  follows:  let/,  plt />2,  •••/„,  represent  the  price 
per  unit  of  every  commodity  sold  on  a  certain  date. 
Let  q,  qv  qz,  •••  qn  represent  the  total  number  of 
units  of  each  article.  Then/^  ~  P\  <2\  ~  Ptfli  ~  '" 
pnqn  are  equal  to  the  total  value  exchanged,  or  $X. 

Hence  the  value  of  $  i  will  be  pq  —  p^q\  -*  /2  ^2 

pn  qn  all  divided  by  X.  Now,  if  this  process  be  re- 
peated at  any  other  date  and  the  value  of  $  i  deduced, 
we  shall  be  able  to  determine  the  change  in  the  price 
level.  Obviously,  however,  we  cannot  construct  a 
series  of  all  the  prices  of  all  articles.  To  make  the 
series  manageable,  and  the  scheme  practicable,  we 
must  (i)  group  similar  articles,  and  (2)  omit  the 
less  important  articles,  so  as  thereby  to  reduce  the 
number  of  terms  ;  (3)  we  must  allow  for  increase  or 
decrease  in  old  items  and  the  addition  of  new  items. 
By  making  all  these  allowances  the  series  may  be 
reduced,  as  Professor  Nicholson  reduces  it,  to  very 
manageable  shape. 

s  257 


MONEY 

Mr.  Giffcn  and  others  have  suggested  as  a  meas- 
ure of  the  changes  in  the  value  of  money,  varia- 
tions in  the  amount  of  money  as  compared  with 
those  in  the  amount  of  goods  imported  and  exported 
at  different  times.  In  other  words,  he  seeks  to 
compare  the  volume  of  money  with  the  volume  of 
foreign  trade.  Obviously,  if  all  other  things  remain 
the  same,  an  increase  in  the  volume  of  trade  would 
reveal  an  increase  in  the  amount  of  money.  If 
the  amount  of  money  has  not  increased  pari  fassn 
with  trade,  its  value  must  have  fallen. 

22.  Professor  Edge  worth's  Presentation  of  the 
Solutions  of  the  Problem  of  measuring  Price 
Changes. — The  various  solutions  of  the  problem 
of  measuring  the  changes  in  the  value  of  money 
have  been  admirably  grouped  by  Professor  Edge- 
worth  in  a  table  which,  modified  in  form,  is  as 
follows  : l  ' — 

We  may  have 

A.    A  solution  irrespective  of  any  hypothesis  as  to 
the  cause  of  the  changes,  the  object  being 
I.    The    consideration  of    a  standard    for    de- 
ferred payments,  the  standard  being  re- 
quired to  be 

I.    Constantly  equivalent  to  the  same  quan- 
tity of  valuables  and  its  constituents 
being  determined  by 
a  '    Items  of  national  consumption. 
b '    On  some  other  basis  than  national 
consumption. 

1  Report  of  the  Brit.  Assoc.  for  Adv.  of  Sci.,  1887,  p.  260. 
258 


MEASUREMENT  OF   CHANGES  IN   PRICES 

2.    Varying  on  the  principle  of    a   sliding 

scale  to  the  constituents. 
a  '    Corresponding  to  the  items  of  na- 
tional consumption. 
b '    Determined    on    some    other   basis 

than  national  consumption. 
Such  as 

a  "    National  incomes. 
b"    National  capital. 
II.    Something  else   than    consideration  of  the 

standard  for  deferred  payments. 
B.    A  solution  being  based  upon  some  hypothesis 

as  to  the  cause  of  changes  and  their 
I.    Being  irrespective  of  the  quantities  of  the 

commodities,  or 

II.    Account  being  taken  of  the  quantities  of  the 
commodities. 


259 


CHAPTER   XIII 

THE   STANDARD   OF   DEFERRED   PAYMENTS 

REFERENCES  :  Clark,  J.  B.,  Ultimate  Standard  of  Value,  Yale 
Rev.,  November,  1892;  Fetter,  F.,  Total  Utility  Standard  of  De- 
ferred Payments,  Annals  Amer.  Acad.,  May,  1895  !  Jevons,  W.  S., 
Money  and  Mechanism  of  Exchange,  Ch.  25  ;  Jordan,  W.  Leighton, 
The  Standard  of  Value,  6th  ed. ;  Knies,  K.,  Das  Geld,  pp.  396-431  ; 
Laughlin,  J.  L.,  Principles  of  Money,  Ch.  3  ;  Merriam,  L.  S.,  Theory 
of  Final  Utility  in  its  Relation  to  Money  and  the  Standard  of 
Deferred  Payments,  Annals  Amer.  Acad.,  January,  1893,  May,  1894; 
Nicholson,  J.  S.,  Money  and  Monetary  Problems,  5th  ed.,  pp.  19-28; 
Report  of  the  Indianapolis  Monetary  Commission,  1898,  pp.  92-112; 
Ross,  E.  A.,  Standard  of  Deferred  Payments,  Annals  Amer.  Acad., 
November,  1892,  November,  1893  ;  Scott,  W.  A.,  Money  and  Bank- 
ing, Ch.  3 ;  Walker,  F.  A.,  Money,  Trade,  and  Industry,  Ch.  3 ; 
White,  H.,  Money  and  Banking,  Ch.  6. 

1.  Definition  of  the  Standard.  —  By  the  stand- 
ard of  value  is  meant,  strictly  speaking,  the  value 
of  a  definite  quantity  of  the  commodity  chosen  to 
measure  value.  We  commonly  say  that  this  or 
that  commodity,  as  gold,  is  the  standard.  But 
this  is  only  a  short  way  of  saying  that  it  is  the 
value  of  a  certain  quantity  of  the  selected  com- 
modity which  is  the  unit  of  measure  of  value  of  all 
other  things.  A  distinction  is  to  be  made  between 
the  mint  standard  and  the  standard  of  value.  The 
mint  standard  is  simply  the  quantity  of  the  money 
260 


STANDARD  OF  DEFERRED  PAYMENTS 

material  which  the  law  requires  to  be  put  into  a 
given  unit,  or  denomination,  of  money.  The  value 
standard  is  the  value,  or  purchasing  power,  of  this 
legal  quantity.  But  we  cannot  infer  that  the 
value  of  this  quantity  of  gold  is  invariable  like  its 
weight.  For  example,  the  amount  of  fine  gold  in 
one  dollar  is  23.22  grains.  This  amount  is  invari- 
able, as  long  as  the  law  is  not  changed,  but  its 
value  is  not  so. 

Confusion  sometimes  arises  from  attempts  to 
compare  the  unit  of  measure  of  value  with  the 
ordinary  units  of  measure  of  length  and  weight. 
The  essential  difference  between  the  two  classes 
of  units  lies  in  the  fact  that  the  unit  of  measure  of 
value  changes  with  every  change  in  the  demand 
for  it,  while  the  unit  of  measure  of  length,  or  of 
weight,  is  not  affected,  however  great  or  however 
small  the  demand  for  it  may  be. 

2.  Steadiness  of  the  Standard  Important  for 
Deferred  Payments.  —  The  fact  that  the  standard 
of  value  fluctuates  is  not  of  importance  in  the  case 
of  exchanges  that  are  settled  at  once.  If  goods 
are  sold  and  paid  for  at  the  moment,  we  may 
assume  that  neither  party  to  the  exchange  gains 
or  loses  through  any  change  in  the  value  of  the 
standard.  Quite  contrary  is  the  case,  however,  if 
the  sale  is  made  at  one  time  and  the  payment  at  a 
later  time.  During  the  interval  between  the  sale 
and  payment,  or  between  the  creation  of  the  debt 
and  its  discharge,  a  change  in  the  standard  may 
occur,  which  will  confer  upon  the  amount  of 
261 


MONEY 

money  given  in  settlement  a  greater  or  a  less  pur- 
chasing power  than  it  had  at  the  time  the  debt  was 
created.  The  great  majority  of  business  transac- 
tions are  done  on  credit.  Purchases  are  made  to 
be  paid  for  in  thirty,  sixty,  ninety  days,  or  later. 
The  longer  the  period  between  purchase  and 
settlement,  the  greater  the  opportunity  for  loss  on 
account  of  the  variation  in  value.  If,  for  example, 
a  farmer  should  borrow  $1000  at  six  per  cent, 
for  one  year,  when  wheat  is  selling  for  $i  a 
bushel ;  and  if,  by  the  time  of  payment,  the  price 
of  his  wheat  had  fallen  to  90  cents,  it  would  be 
necessary  for  him  to  sell  11774  bushels  to  pay  his 
debt.  Measured  in  wheat,  the  rate  of  interest  has 
become  11.8. 

3.  Assignment  of  the  Gain  or  Loss  due  to  a 
Change  in  Prices.  —  It  is,  then,  the  relation  of 
debtor  and  creditor  which  gives  importance  to  the 
standard  of  deferred  payments.  The  standard 
should  be  such  that  the  discharge  of  the  debt 
shall  preserve  the  equities  of  the  exchange  be- 
tween creditor  and  debtor.  It  is  difficult,  indeed, 
to  decide  what  constitutes  equity  in  such  cases. 
A  change  in  the  standard  implies  that  the  amount 
of  money  which  the  borrower  will  surrender  at 
the  time  of  the  repayment  of  the  debt  will  buy 
more  or  less  goods  than  at  the  time  of  the  crea- 
tion of  the  debt.  Should  the  benefit  of  apprecia- 
tion go  entirely  to  the  creditor  and  the  loss  fall 
entirely  on  the  debtor,  or  vice  versa  ?  Or  shall  the 
gain  or  loss  go  to  neither,  or  shall  it  be  shared 

262 


STANDARD  OF  DEFERRED  PAYMENTS 

between  them  ?  It  is  sometimes  urged  that  a 
change  in  the  price  level  is  a  social  change,  and 
that  the  gain  is,  to  the  one  who  gets  it,  an  unearned 
increment,  and  the  loss  an  unearned  decrement. 
Those  who  insist  that  all  unearned  increment,  all 
value  due  to  social  progress  rather  than  to  the 
efforts  of  individuals,  justly  belongs  to  society  as  a 
whole,  urge  that  it  is  the  community  to  which  the 
gain  should  accrue,  or  on  which  the  loss  should 
fall.  While  a  defence  of  this  claim  can  be  made, 
the  impossibility  of  fixing  on  society  the  gain  or 
loss  in  any  case  makes  the  proposal  impracticable. 
Moreover,  the  loss,  if  it  went  to  society,  would  be 
distributed  among  the  members  of  the  community, 
and  this  distribution  could  not  fail  to  be  as  inequi- 
table as  the  receipt  of  the  gain  by  creditors,  or 
debtors,  or  both,  might  be. 

The  welfare  of  society  is  best  promoted  by  let- 
ting the  gain  or  loss,  due  to  the  change  in  the 
standard,  be  shared  by  the  parties  to  the  contract. 
The  social  advantage  of  this  course  is  a  phase  of 
the  benefits  of  private  property  and  freedom  of 
contract.  As  against  each  other,  the  creditor  and 
debtor  each  has  an  equitable  claim  to  share  what- 
ever gain  accrues.  If  the  value  of  money  rises, 
the  debtor  confers  a  benefit  on  the  creditor  by 
giving  him  the  advantage  of  a  sure  investment,  for 
a  definite  period,  during  which  his  money  increases 
in  value.  It  is  true  that  if  the  creditor  had  his 
money,  he  could  get  the  benefit  of  the  change  in 
prices  by  renewed  investment.  The  point  is,  that 

263 


MONEY 

he  is  freed  from  the  necessity  of  reinvesting  at 
a  lower  rate.  The  benefit,  such  as  it  is,  comes  to 
him  for  a  definite  period.  He  secures  an  addi- 
tional advantage,  moreover,  in  the  enhanced  value 
of  the  money  which  he  receives  as  interest.  On 
the  other  hand,  the  debtor  gets  a  benefit  from  hav- 
ing command  of  the  money  for  a  definite  period, 
for  an  element  of  uncertainty  is  thereby  removed 
from  his  business. 

4.  Apportionment  of  Gain  or  Loss  due  to  Change 
in  Prices  between  Creditor  and  Debtor. —  In  a  truly 
ethical  sense,  therefore,  the  creditor  and  debtor 
are  partners,  and  they  should  share  the  gains  and 
losses  of  their  partnership.  Now,  how  ought  the 
gain  or  loss  to  be  shared  ?  Shall  it  be  in  a  pro- 
portion determined  by  the  social  welfare,  or  in  a 
proportion  determined  by  some  standard  of  jus- 
tice between  the  individuals  ?  We  want  to  pro- 
vide that  the  loss  caused  by  a  change  in  society's 
economic  efficiency,  or  fashion,  shall  not  be  laid 
altogether  upon  the  unoffending  backs  of  one 
group  of  its  members,  and  the  gain  on  those  of 
another.  We  are  seeking  to  provide  that  the 
money  owner  and  the  money  borrower  shall  reap 
where  they  have  not  sown,  but  that  neither  shall 
be  permitted  to  take  the  whole  crop  to  himself. 
Perhaps  the  usual  opinion  is  that  the  welfare  of 
society  is  promoted  by  giving  the  greater  share  of 
advantage  to  the  debtor  class.  If  this  be  true, 
and  if  we  believe  that  the  gain  or  loss  from  a 
change  in  the  value  of  money  during  a  period  of 

264 


STANDARD  OF  DEFERRED  PAYMENTS 

debt  should  be  so  apportioned  as  to  promote  the 
social  welfare,  then  we  would  assign  the  larger 
share  of  the  gain  and  the  smaller  share  of  the  loss 
to  the  debtor.  But  a  truer  statement  would  be, 
that  the  welfare  of  society  is  promoted  by  appor- 
tioning the  gain  or  loss  according  to  the  economic 
efficiency  of  the  parties  in  promoting  the  social 
welfare.  This  would  usually,  but  not  always,  give 
the  debtor  the  larger  share.  Undoubtedly,  the 
debt  should  be  so  paid  as  to  leave  each  in  the 
same  relative  position  in  the  scale  of  economic 
welfare  as  he  would  have  been  if  no  change  in  the 
value  of  money  had  taken  place  during  the  period 
of  the  debt ;  or,  what  amounts  to  the  same  thing,  in 
the  same  relative  position  in  the  scale  of  economic 
welfare  as  each  held  at  the  time  of  the  loan,  pro- 
vided, of  course,  that  no  other  cause  of  change  in 
the  economic  condition  of  either  of  the  parties 
arises  in  the  meantime,  or  disregarding  such  a 
change  if  it  does  occur.  At  the  time  of  the  loan 
the  money  of  the  lender  had  a  certain  value  to  him, 
estimated  by  the  subjective  value  of  the  articles 
which  it  would  buy;  or  it  stood  for  a  certain 
profit  if  he  employed  it  for  the  purchase  of 
articles  for  use  in  his  business.  The  same  is  true 
of  the  debtor.  Our  aim  should  be  to  apportion 
the  gain  or  loss,  due  to  a  change  in  the  value  of 
money,  in  such  a  way  that,  so  far  as  the  debt  is 
concerned,  creditors  and  debtors  shall  have  the 
same  relative  purchasing  efficiency  as  they  had 
before.  We  shall  examine  later  the  exact  mean- 
265 


MONEY 

ing  of  this  phrase  and  its  significance  for  the  ques- 
tion in  hand. 

5.  The  Standard  of  Deferred  Payments  a  Social 
Concept  not  a  Corrective  of  Individual  Fluctuations. 
—  Before  considering  the  method  whereby  it  is 
proposed  to  establish  equity  in  the  payment  of 
debts,  we  must  distinguish  between  a  standard 
which  is  just1  from  the  point  of  view  of  society  as 
a  whole,  and  one  which  is  just  between  particular 
debtors  and  creditors.  A  standard  could  be  just, 
both  socially  and  in  all  individual  cases,  only  if 
the  prices  of  all  goods  had  changed  in  the  same 
degree.  This,  however,  is  impossible.  For  a 
change  in  the  value  of  money,  arising,  for  ex- 
ample, from  a  change  in  its  quantity,  causes  dis- 
proportionate changes  in  the  prices  of  goods, 
because  changes  in  the  marginal  utility  of  com- 
modities are  not  proportional  to  changes  in  their 
supply  or  in  the  demand  for  them.  If  the  com- 
modity of  the  debtor,  wherewith  he  secures  the 
standard  commodity  to  pay  his  debt,  has  not 
changed  with  reference  to  the  standard  in  the 
same  degree  as  have  other  goods,  he  must  give 
more  or  less  of  it  than  he  otherwise  would,  in 
order  to  get  the  money  which  will  buy  a  quantity 
of  composite  units  of  goods  sufficient  to  discharge 
his  debt.  From  the  point  of  view  of  society,  the 
debt  is  equitably  discharged  if  the  number  of  com- 
posite commodity  units  given  in  payment  is  to  the 

1  This  distinction  must  be  made  whatever  ideal  of  justice  between 
creditor  and  debtor  is  adopted. 

266 


STANDARD  OF  DEFERRED  PAYMENTS 

number  which  the  borrower  received,  in  the  in- 
verse ratio  of  the  values  of  these  two  quantities. 
If  half  the  goods  on  sale  go  up  in  price  and  half 
go  down,  in  such  a  way  as  to  leave  the  price  level 
unchanged,  the  return  of  the  amount  of  money 
borrowed  would  be,  from  the  social  point  of  view, 
a  just  discharge  of  the  debt,  because  this  money 
commands  at  the  two  dates  the  same  amount  of 
goods  in  general.  If,  however,  the  goods  of  the 
debtor  are  among  those  that  have  fallen,  while  the 
goods  consumed  by  the  creditor  are  among  those 
that  have  risen,  neither  debtor  nor  creditor  escapes 
loss.  Under  other  conditions  the  debtor  may 
gain  and  the  creditor  lose,  or  vice  versa.  Suppose 
the  debtor's  commodity  enters  into  the  composite 
unit  as  -joVo~  °^  the  whole,  while  its  exchange 
value  has  fallen  |.  Obviously,  the  value  of  the 
composite  commodity  unit,  which  is  to  be  returned 
in  payment  of  the  debt,  will  be  affected  only  in  a 
very  slight  degree.  The  return  of  a  given  number 
of  composite  commodity  units  will,  from  the  social 
point  of  view,  be  a  just  discharge  of  the  debt ;  but 
the  number  of  units  of  his  own  commodity  which 
the  debtor  must  now  give,  to  get  the  money  value 
of  this  number  of  composite  commodity  units,  will 
be  doubled.  The  failure  of  the  general,  or 
socially  just,  standard  to  apply  to  individual  cases 
is  similar  to  the  failure  of  index  numbers,  which 
show  changes  in  the  level  of  prices,  to  tell  us  any- 
thing about  the  prices  of  goods  consumed  by  a 
particular  social  class. 

267 


MONEY 

It  is  clear,  then,  that  we  cannot  find  a  standard 
which  will  distribute  equitably  the  gain  or  loss 
that  accrues  from  a  change  in  the  price  of  the 
commodity  which  a  particular  debtor  produces. 
The  most  that  can  be  expected  is  to  find  a  stand- 
ard which  will  distribute  the  effects  of  changes 
of  general  prices,  or  offset  the  variations  in  the 
price  level.  It  is  disturbances  of  social,  not  indi- 
vidual, valuations  that  a  general  standard  of  de- 
ferred payments  will  prevent  or  correct,  if  it  can 
be  found ;  yet  it  is  the  variation  of  individual  valu- 
ations that  is  important  to  particular  creditors  or 
debtors.  The  best  that  can  be  done  is  to  find  a 
general  standard,  if  possible,  and  then  to  adapt 
it  to  particular  cases,  as  the  circumstances  neces- 
sitate or  justify. 

6.  An  Invariable  Standard  Undesirable  and  Im- 
possible.—  Some  people  think  that  the  hardships 
attendant  upon  a  changing  price  level  would  be 
cured  by  the  adoption  of  an  invariable  standard 
of  value.  By  an  invariable  standard  is  meant  one 
of  which  a  given  weight  would  always  purchase 
the  same  quantity  of  goods.  Such  a  standard, 
however,  is  impossible  of  realization.  For,  in  the 
first  place,  the  demand  for  a  standard  commodity 
for  use  in  making  payments  is  one  of  the  causes 
of  its  value,  and  this  demand  is  constantly  chang- 
ing. If  there  were  no  actual  use  of  the  standard 
in  making  payments,  so  that  its  value  were  inde- 
pendent of  the  demand  for  means  of  payment, 
its  fluctuations  would  be  less ;  but,  even  then,  they 

268 


STANDARD  OF  DEFERRED  PAYMENTS 

could  not  disappear  altogether ;  for  a  demand  of 
some  kind,  whether  for  monetary  purposes  or  not, 
is  necessary  to  value,  and  a  demand,  although  non- 
monetary,  would  be  bound  to  fluctuate. 

In  the  second  place,  a  standard  which  was 
invariable,  in  the  sense  that  it  would  measure  and 
correct  changes  in  the  price  level,  could  not,  as 
we  have  seen,  do  the  same  for  changes  in  the 
prices  of  particular  articles,  since  the  price  level  may 
change  without  any  change  in  the  prices  of  par- 
ticular commodities ;  but  it  is  in  these  latter  that  the 
interest  of  individual  debtors  and  creditors  centres. 

Moreover,  an  invariable  standard  is  undesirable, 
even  if  possible,  because  it  would  throw  the  bene- 
fit of  industrial  progress  into  the  hands  of  the 
owners  and  producers  of  goods ;  whereas  a  perfect 
standard  should  distribute  these  benefits  among 
the  different  classes  of  society.  It  should  pur- 
chase more  goods  and  less  labor  as  time  passes 
and  progress  is  made ;  because,  as  Professor  J.  B. 
Clark  has  pointed  out,  industrial  progress  implies 
that  a  larger  amount  of  goods  shall  be  obtained  for 
the  same  expenditure  of  labor;  hence  the  pur- 
chasing power  of  the  standard  should  rise  as  man's 
command  over  nature  increases.  A  change  of  this 
kind  will  not  remove  the  inequalities  of  distribution, 
but  it  will  bring  to  the  different  classes  of  society 
some  of  the  benefit  to  which  they  are  entitled. 

7.    The  Incompatibility  of  Returns  of  Equal  Value, 
Equal   Utility,  etc.  —  We    must   search,   then,  not 
for   an    invariable    standard,    but   for   one    whose 
269 


variations  correspond  with  changes  of  economic 
conditions,  in  such  a  way  as  to  effect  an  equitable 
division  of  the  benefits  of  these  changes.  By 
what  one  of  the  various  returns  which  the  debtor 
can  make  can  this  purpose  be  accomplished  ? 
Of  course  the  debtor  always  returns  either  money 
or  goods,  but  the  character  and  the  quantity 
returned  depend  on  the  standard  of  payment 
adopted.  He  may  pay  his  debt  in  terms  of  units 
of  goods,  in  terms  of  total  utility,  or  in  terms  of 
marginal  utility,  or  value.  It  is,  perhaps,  super- 
fluous to  point  out  that  the  return  of  the  same 
consumption  commodity,  or  the  same  quantity  and 
quality  of  consumption  commodities,  does  not 
imply  a  return  of  the  same  utility  or  value.  The 
utility  and  the  value  of  goods  depend  on  their 
physical  and  psychical  efficiency ;  that  is,  on  their 
capacity  to  satisfy  physical  and  psychical  wants. 
We  may  bring  out  the  difference  between  return- 
ing the  same  articles,  the  same  utility,  and  the 
same  value,  by  the  following  tables.  At  the  time 
of  borrowing,  successive  units  of  the  article  bor- 
rowed show  utility,  cost,  and  value  as  follows  :  — 


No.  OF 

UNITS 

PHYSICAL       PSYCHICAL 

EFFICIENCY     EFFICIENCY 

UTILITY 

COST  IN  DAYS'  LABOR  l 

I 

4.00 

3.00 

y.OO 

3- 

or  3.00  or 

3.00 

2 

3-80 

2.75 

6.55 

3- 

ur  2.90  or 

3.01 

3 

3.60 

2.50 

6.10 

3- 

or  2.80  or 

3.02 

4 

340 

2.0O 

5-40 

3- 

or  2.75  or 

3-03 

5 

3.20 

1.90 

5.10 

3- 

or  2.70  or 

3-°4 

1  See  foot-note,  p.  271. 
270 


STANDARD    OF    DEFERRED    PAYMENTS 
At  the  time  of  payment  the  conditions  are  these  :  — 


No.  OF 
UNITS 

PHYSICAL 
EFFICIENCY 

PSYCHICAL 
EFFICIENCY 

UTILITY 

COST  IN  DAYS'  LABOR  l 

I 

4.OO 

2.OO 

6.00 

2 

3.80 

1.  80 

5.60 

3 

3.65 

I.50 

5-J5 

4 

345 

0.90 

435 

5 

3-25 

0.70 

3-95 

Same  as  before,  or 

6 

3-05 

o-35 

3-40 

less,  or  more. 

7 

2.75 

O.2O 

2-95 

8 

2.70 

O.OO 

2.70 

9 

2.65 

0-75 

1.90 

10 

2.60 

I.OO 

i.  60 

Suppose  that  four  units  of  the  commodity  are 
borrowed.  According  to  the  first  part  of  the 
table,  we  find  that  the  borrower  gets  25.05  units 
of  total  utility,  21.6  units  of  value,  and  a  number 
of  days'  labor  which  varies  according  as  the  article 
is  produced  under  conditions  of  constant,  increas- 
ing, or  decreasing  returns.  If,  now,  the  condi- 
tions change,  so  that  the  value  of  the  article  in 
question  falls  as  indicated  in  the  second  part  of 
the  table,  it  will  be  necessary  to  return  five  units 
in  order  to  give  back  the  same  total  utility.  To 
restore  the  same  value,  eight  units  of  the  commod- 
ity must  be  given  ;  and  to  restore  the  same  labor 
cost  either  the  same  number  of  units  of  commod- 
ity, or  more  or  less,  must  be  given,  according  to 
the  conditions  of  production  of  the  article.  Hence, 

1  According  as  the  article  is  one  of  constant,  of  increasing,  or  of 
decreasing  returns. 

271 


MONEY 

if  we  return  the  same  number  of  units  of  the 
same  commodity,  we  may  or  may  not  return  the 
same  physical  efficiency,  but  we  will  certainly 
return  less  psychical  efficiency,  less  total  utility, 
and,  probably,  less  cost.  If  we  seek  to  return 
the  same  cost,  we  will  very  likely  give  back  more 
goods,  less  value,  and  less  total  utility.  If  we 
would  restore  the  same  total  utility,  we  would  give 
back  a  larger  amount  of  goods,  a  smaller  value, 
and  probably  a  different  cost.  According,  then, 
as  we  choose  one  or  another  of  these  units, — 
commodity,  cost,  utility,  value, — we  have  a  dif- 
ferent standard  and  return  a  different  thing. 

8.  Classification  of  Standards  of  Deferred  Pay- 
ments. — Corresponding  to  the  choice  we  make  of 
the  thing  to  be  returned  we  have  the  following 
standards  :  — 

1.  The  commodity  standard.    According  to  this 
the  debtor  returns  the  same  quantity  and  quality 
of  goods. 

2.  The  labor  standard.     This  standard  requires 
the  return  of  the  goods  produced  in  the  same  labor 
time  as  the  articles  borrowed. 

3.  The    disutility    of    labor  standard.     By  this 
standard  the  debtor  is  required  to  return  goods  in 
amount   such    that   the  disutility  of  the  labor  in- 
volved in  the  production  of  the  last    unit  is  just 
equal  to   the  marginal  utility  of  the    quantity  of 
goods  borrowed. 

4.  The  total  utility  standard.     According  to  this 
standard  an  amount  of    commodities    is    returned 

272 


STANDARD  OF  DEFERRED  PAYMENTS 

whose  utility  is  somewhat  greater  than  the  abso- 
lute utility  borrowed,  by  an  amount  dependent  on 
the  degree  of  change  in  the  price  level. 

5.  The  marginal  utility,  or  value  standard.    The 
debtor,  under  this  standard,  is  expected  to  return 
commodities  embodying  the   same  value  that   he 
borrowed. 

6.  What  may  be  called  the  purchaser's  surplus 
standard.     By  this  standard  the  debtor  will  return 
to  the  lender  an  amount  of  goods  which  will  leave 
each  in  the  same  position  relatively  to  the  marginal 
purchaser  as  he  was  before ;  that  is,  will  afford  the 
same    proportionate   purchaser's    surplus     as    the 
amount    of     money    borrowed    yielded    each    at 
the  time  of  the  loan.     We  proceed  to  the  discus- 
sion of  these  standards  in  order. 

9.  The  Single  Commodity  Standard.  —  The  as- 
sumption underlying  the  commodity  standard  is 
that  the  return  of  the  same  quantity  and  quality  of 
goods  as  were  borrowed  will  constitute  an  equi- 
table discharge  of  the  debt.  This  is  only  another 
way  of  saying  that  the  return  of  the  same  absolute 
utility  is  equitable.  The  debtor  may  make  this 
return,  according  to  circumstances,  either  by  giving 
back  the  same  quantity  of  the  same  commodity,  or 
the  same  utility  embodied  in  different  articles. 
But  the  return  of  consumption  goods,  the  same  in 
quality  and  quantity  as  were  borrowed,  usually 
means,  as  we  have  seen,  a  return  of  a  different 
value,  a  different  utility,  and  a  different  cost.  If 
the  price  level  has  changed  at  all,  whether  from  a 
T  273 


MONEY 

change  in  the  article  borrowed  or  in  others,  the 
return  of  the  same  article  will  fail  to  distribute 
the  benefit  of  the  change  between  creditor  and 
debtor. 

The  only  important  instance  of  the  discharge  of 
debts  by  the  return  of  the  article  loaned  is  that  of 
money  debts.  This,  of  course,  is  the  form  in 
which  debts  are  now  usually  contracted  and  paid. 
Money,  however,  embodies  purchasing  power  in  a 
general  form,  so  that  its  utility  and  value  do  not 
depend  on  the  physical  and  psychical  efficiency  of 
a  single  article.  Therefore,  it  is  on  an  entirely  dif- 
ferent footing  from  all  other  goods,  and  is  not  to  be 
considered  in  this  connection.  It  is  easy  to  prove 
that  no  single  consumption  good  can  be  a  good 
standard  of  deferred  payments ;  but  the  reasoning 
which  proves  this  will  fail  in  many  respects  when 
applied  to  money. 

Wheat  has  been  urged  by  some  writers  as  a  suit- 
able single  article  for  standard  purposes,  for  the 
reason  that  it  has,  or  is  thought  to  have,  great 
steadiness  of  value  through  long  periods  of  time. 
Before  the  development  of  modern  transportation 
the  price  of  wheat  was  remarkably  steady.  Adam 
Smith  remarked  that  "  Corn  ...  is,  in  all  the 
different  stages  of  wealth  and  improvement,  a 
more  accurate  measure  of  value  than  any  other 
commodity  or  set  of  commodities."1  What  Smith 
had  in  mind,  however,  in  this  statement,  as  an 

1  "Wealth  of  Nations,"  Bk.  I.,  Ch.  II.  (Rogers  ed.,  I.,  I,  p. 
198.) 

274 


STANDARD  OF  DEFERRED  PAYMENTS 

ultimate  standard,  was  really  labor.  He  used 
wheat  merely  as  a  convenient  means  of  measuring 
labor  against  gold  and  silver,  because  he  believed 
that  for  long  periods  a  given  amount  of  wheat 
was  more  nearly  a  product  of  the  same  quantity  of 
labor  than  was  the  case  with  any  other  article. 

An  interesting  historical  application  of  the  wheat 
standard  is  the  so-called  Fiars'  Price  in  Scotland. 
"  Fiars'  prices  in  the  law  of  Scotland  are  the  aver- 
age price  of  each  of  the  different  sorts  of  grain 
grown  in  each  county,  as  fixed  annually  by  the 
sheriff,  usually  after  a  verdict  of  the  jury  ;  and 
they  serve  as  a  rule  for  ascertaining  the  value  of 
the  grain  due  to  feudal  superiors  and  to  the  clergy 
or  to  law  proprietors  of  teinds,  to  landlords  as  a 
part  or  whole  of  their  rents,  and  in  all  cases 
where  the  price  of  grain  has  not  been  fixed  by  the 
parties."  1 

A  sufficient  answer  to  the  advocacy  of  the  wheat 
standard,  however,  is  the  course  of  the  price  of 
wheat  in  the  last  ten  or  fifteen  years.  The  open- 
ing up  of  fertile  lands  in  the  West,  and  the  develop- 
ment of  the  transportation  system  of  the  world, 
have  put  wheat  among  the  articles  whose  price 
varies  in  a  marked  degree. 

10.  The  Nature  of  the  Tabular,  or  Multiple 
Commodity,  Standard.  —  Of  greater  importance,  be- 
cause of  the  support  it  has  received  from  econo- 
mists and  publicists,  as  well  as  because  of  its  more 
scientific  character,  is  the  proposal  to  establish 

1  "  Encyclopaedia  Britannica,"  gih  ed. 

275 


MONEY 

a  standard  based  on  the  prices  of  a  number  of 
articles.  This  is  the  Tabular  Standard.  The  unit 
of  measure  under  this  standard  is  the  aggregate 
price  at  a  given  time  of  a  long  list  of  articles,  a 
definite  quantity  and  quality  of  each  being  chosen, 
just  as  is  done  in  making  a  table  of  index  numbers. 
A  table  of  the  prices  of  these  articles  is  made 
when  the  debt  is  created,  and  again  when  it  is  to 
be  paid.  If  we  call  the  sum  of  the  prices  of  the 
articles  at  the  creation  of  the  debt  100,  then  the 
amount  of  money  to  be  paid  is  to  the  amount  bor- 
rowed as  the  sum  of  the  prices  at  the  time  of  pay- 
ment is  to  100.  That  is,  the  debt  is  really  regarded 
as  consisting  of  as  many  units  of  the  Tabular 
Standard  as  the  money  loaned  would  buy  at  the 
time  the  debt  was  incurred.  The  amount  of  money 
which  will  buy  these  units  when  the  debt  is  due  is 
what  the  debtor  pays.  For  example  :  if,  on  the 
first  of  January,  A  borrows  $1000  payable  in  one 
year,  he  finds  the  number  of  units  of  the  tabular 
standard  which  $1000  will  buy  on  January  first. 
Suppose  this  number  is  ten.  He  then  gives  his 
creditor  a  note  for  ten  units  of  the  tabular  stand- 
ard, and  on  the  first  of  the  following  January 
reference  is  made  to  the  price  list  then  existing,  to 
determine  how  much  money  ten  units  of  the  tabu- 
lar standard  will  then  command.  He  may  find 
that  $990  will  buy  the  same  quantity  of  the  goods 
used  in  making  up  the  table  as  $1000  would  buy 
the  year  before.  In  that  case  the  debt  is  settled 
by  the  payment  of  $990. 

276 


STANDARD  OF  DEFERRED  PAYMENTS 

11.  The  Equity  of  the  Multiple  Standard.  —  Of 
course  it  would  be  necessary  to  have  some  means 
of  insuring  the  accuracy  of  the  prices  quoted  in 
making  up  the  tabular  standard.  This  would  be 
done  by  creating  an  official  commission,  whose  duty 
it  would  be  to  publish  at  stated  periods,  say  weekly 
or  monthly,  changes  which  have  taken  place  in  the 
prices  of  the  commodities  entering  into  the  table. 
With  these  prices  in  hand,  it  would  be  an  easy 
matter  for  an  individual  to  find  out  what  his  debt 
was  worth  in  money,  at  any  date.  If  the  tables 
included  all  articles  sold  at  the  time,  in  the 
proportion  in  which  they  are  offered  for  sale,  and 
if  the  amount  of  each  article  in  the  table  were 
scaled  down  so  that  the  price  of  the  whole  should 
become  that  of  a  unit  of  money,  the  tabular  unit 
would  become  what  we  have  called  the  composite 
commodity  unit.  The  aim  of  the  tabular  standard 
of  deferred  payments  is,  therefore,  to  return  at  the 
time  of  payment  as  many  such  composite  com- 
modity units  as  the  money  borrowed  enabled  the 
borrower  to  secure  at  the  time  the  loan  was  made. 
The  debtor,  by  this  method,  would  return  the  same 
income  in  goods  as  he  received.  On  the  face  of 
it,  this  seems  just.  What  could  seem  fairer  than 
that  the  creditor  should  get  back  as  a  payment 
an  amount  of  consumable  goods  equivalent  in 
quantity  to  that  which  he  had  loaned  ? 

The  plan,  however,  is  really  not  so  equitable  as 
it  seems.  If  throughout  the  debt  period  the  scale 
of  production  and  consumption  remained  constant; 
277 


MONEY 

if,  in  other  words,  the  marginal  utility  of  goods 
neither  fell  nor  rose,  so  that  the  marginal  utility  of 
our  composite  commodity  unit  remained  not  only  a 
constant  quantity,  but  a  constant  derived  from  the 
same  relative  values,  the  proportion  of  the  articles 
entering  in  to  make  up  the  unit  being  unchanged, 
then  the  tabular  standard  would  be  equitable. 
But  changes  in  the  price  level  are  nearly  always, 
perhaps  always,  accompanied  by  changes  in  values, 
changes  in  the  marginal  utility  of  goods.  Instead 
of  correcting  these,  the  tabular  standard  gives  the 
benefit  of  them  to  only  one  party  to  the  contract. 
If  goods  become  twice  as  abundant  as  they  were, 
so  that  the  scale  of  living  has  risen  considerably 
during  the  debt  period,  the  lender  who  receives  in 
payment  of  a  debt  a  quantity  of  goods  equal  to  the 
quantity  which  he  loaned  the  year  before  is  thereby 
put  lower  in  the  scale  of  social  welfare  than  he 
would  be  if  he  received  an  amount  of  goods 
increased  in  sufficient  measure  to  give  him  his 
share  of  the  increase  in  social  prosperity.  For  we 
have  seen  that  the  same  quantity  of  goods  does 
not  always  represent  the  same  quantity  of  value,  or 
imply  the  same  degree  of  welfare.  By  returning 
the  same  amount  of  goods,  the  benefit  of  a  rise  in 
prices  is  given  wholly  to  the  creditor,  and  the 
benefit  of  a  fall  wholly  to  the  debtor.  Each 
receives,  in  his  respective  goods,  a  value  to  which 
he  is  not  entitled.  But  it  is  precisely  this  result 
that  the  tabular  standard  and  all  similar  devices 
aim  to  prevent. 

278 


STANDARD  OF  DEFERRED  PAYMENTS 

12.  Theoretical  and  Practical  Objections  to  the 
Multiple  Standard.  —  As  Mr.  L.  S.  Merriam  has 
pointed  out,1  the  tabular  standard  aims  to  restore 
the  same  absolute  utility  as  was  loaned.  Yet  it 
ignores  one  of  the  elements  of  utility  and  of  value. 
We  have  seen  that  utility  is  derived  from  the  phys- 
ical efficiency  and  the  psychical  efficiency  of  com- 
modities ;  that  is,  their  power  to  satisfy  physical 
and  psychical  needs.  If  the  latter  were  altogether 
removed,  so  that  physical  efficiency  alone  consti- 
tuted want-satisfying  capacity,  then  the  tabular 
standard  would  be  just  enough.  Its  advocates 
seem  to  have  been  misled  by  concentrating  their 
attention  on  the  utility  of  such  goods  as  wheat, 
and  other  necessaries  of  life,  which  have  little  or 
no  psychical  efficiency.  Their  utility  depends  ex- 
clusively, or  mainly,  upon  their  physical  efficiency 
—  their  capacity  to  satisfy  physical  wants.  The 
bicycle,  however,  is  an  example  of  another  kind  of 
goods.  The  loan  of  a  bicycle  fresh  from  the  shop 
in  1895  could  not  be  repaid  in  1904  by  the  return 
of  an  exactly  similar  bicycle,  made  at  the  same 
shop  and  at  the  same  expense,  because  fashion 
in  bicycles  has  changed,  and  the  element  of  psy- 
chical efficiency  in  their  utility  and  value  has 
largely  disappeared.  The  physical  efficiency  of 
a  bicycle  is  as  great  as  ever ;  its  total  utility, 
or  want-satisfying  power,  is  less,  because  of  the 
change  in  fashion,  and  its  value  is  less.  Its 
possession  would  now  put  the  owner  in  a  lower 

1  Annals  of Amer.  Acad.  of  Pol.  and  Soc.  Sci.,  III.,  IOI. 
279 


MONEY 

position  in  the  scale  of  social  welfare  than  the 
possession  of  the  bicycle  he  loaned  would  have 
done  ten  years  ago.  There  are  many  other  cases 
of  this  kind,  and  the  tabular  standard  is  not  ap- 
plicable to  them.  It  is,  after  all,  but  a  rough-and- 
ready  method  of  returning  the  same  amount  of 
physical  efficiency.  It  returns  neither  the  same 
total  utility  nor  the  same  value,  nor  a  utility  and 
value  proportionate  to  changes  in  general  prices. 
The  tabular  standard  is  not  suitable  for  ordi- 
nary business  debts,  for  these  are  usually  for  short 
periods,  so  that  the  price  fluctuations  are  not 
ordinarily  great  enough  to  require  a  corrective. 
Moreover,  as  Professor  Laughlin  has  pointed 
out,1  merchants'  accounts  could  not  be  made  to 
balance  under  the  tabular  standard,  since  it  does 
not  entirely  replace  money,  and  the  business  man 
would  therefore  be  obliged  to  keep  his  accounts 
in  both  standards.  He  could  not  strike  a  balance 
between  receipts  and  expenditures,  partly  in  tabu- 
lar standard  units  and  partly  in  money.  A  third 
source  of  trouble  would  come  from  a  lack  of  bal- 
ance between  notes  due  about  the  same  time.  A 
note  for  a  certain  number  of  units  of  the  tabular 
standard  would  not  have  a  fixed  price,  and  could 
not  well  be  discounted.  A  note  which  the  business 
man  had  to  pay  in  three  months  might  not  be  met 
by  the  proceeds  of  another  due  him  a  week  before, 
although  both  were  made  at  the  same  time,  repre- 
sented a  transfer  of  the  same  amount  of  money, 

1  "  Principles  of  Money,"  p.  51. 
280 


STANDARD  OF  DEFERRED  PAYMENTS 

and   the   same   number   of    units   of   the   tabular 
standard. 

The  tabular  standard  would  be  serviceable  in 
cases  where  certainty  in  the  amount  of  income 
in  ordinary  consumable  goods  was  desirable.  For 
the  certainty  of  income  in  articles  of  consumption 
would  in  many  cases  offset  any  loss  that  might 
come  from  a  change  in  the  scale  of  values,  accom- 
panied, as  that  change  would  be,  with  uncertainty 
as  to  the  amount  of  goods  which  a  given  amount 
of  money  would  from  time  to  time  command. 

13.  The  Labor-time  Standard.  —  Labor  has  been 
advocated  at  various  times  as  a  standard  of  deferred 
payments.    The  labor  standard  appears  under  three 
forms.    The  first  makes  mere  labor  time  the  unit  of 
measure ;  the  second,  labor  cost ;  and  the  third,  the 
disutility  of  marginal  labor.    The  labor-time  theory 
is  based  on  the  socialistic  idea  that  labor  is  the  sole 
cause  of  value,  and  that  the  return  of  goods  pro- 
duced by  labor  expended  through  equal  amounts 
of  time  would  be  just.     Different  kinds  of  labor, 
however,    produce    unequal    results    in    the    same 
time,  and  there  is  no  way  of  converting  one  kind 
into  terms  of  another.      Moreover,   the  efficiency 
of    labor  changes  with   progress,   and  the  return 
of  the  same  amount  of  labor  time  would  not  keep 
debtors  and  creditors  in  the  same  relative  positions 
in  a  progressive  society. 

14.  The   Labor-cost   Standard.  —  The  labor-cost 
theory  is  based  on  the  idea  that  equity  is  main- 
tained by  the  return  of  equivalent  costs  of  produc- 

281 


MONEY 

tion.  "  We  aim,"  says  an  advocate  of  this  theory 
"  not  at  the  redelivery  of  article  by  article,  but  at 
the  repayment  of  labor  by  labor,  or  of  sacrifice  by 
sacrifice."  J  Adam  Smith  suggested  that  "  a  day's 
work  of  an  unskilled  laborer  does  not  vary  much 
from  generation  to  generation,  and  that  it,  there- 
fore, may  fairly  be  used  as  a  unit  of  measure  of 
value."  "  He,  of  course,  did  not  mean  that  the 
same  quantity  of  labor  would  always  have  the  same 
exchange  value,  relatively  to  other  things,  but  that 
the  inconvenience  or  negative  utility  of  a  given 
amount  of  exertion  might  be  regarded  as  constant. 
If  all  human  beings  at  different  periods  were  simi- 
larly constituted,  and  if  all  work  could  be  expressed 
in  accurate  physical  formulae,  then  Adam  Smith's 
contention  would  be  sound.  But  neither  supposi- 
tion accords  with  the  facts.  We  cannot  reduce  all 
labor  to  raising  foot-pounds,  nor  can  we  suppose 
that  the  mental  strain  corresponding  to  the  phys- 
ical unit  of  work  is  constant.  Still,  for  remote 
periods,  in  which  the  kinds  of  wealth  differ  very 
much,  unskilled  labor  is  perhaps  the  best  measure 
of  value."  2 

There  is  a  certain  amount  of  truth  in  Smith's 
idea,  and  it  is  one  that  has  always  had  believers;  but 
the  cost  involved  in  such  a  day's  labor  is  difficult 
to  estimate,  and  the  constancy  of  its  value  is  much 
less  certain  in  these  days  of  machinery  than  it  was 

1  Leonard  Courtney,  Nineteenth  Cent.,  April.  1893. 
'2  J.  Shields  Nicholson,  note  on  Bk.  I.,  Ch.  4,  of  the  "  Wealth  of 
Nations,''  Nicholson's  cd.,  p.  409. 

282 


STANDARD  OF  DEFERRED  PAYMENTS 

in  the  time  of  Adam  Smith.  Labor  cost  would 
serve  well  in  a  state  of  society  in  which  each  one 
must  draw  "  direct  from  nature  the  articles  which 
supply  his  wants,"  but  comparison  of  such  a  day's 
labor  in  a  capitalistic  regime  with  a  day's  labor  in 
another  economic  regime  is  out  of  the  question. 
So,  too,  is  the  comparison  of  labor  of  different 
kinds  in  the  same  economic  regime. 

15.  The  Disutility  of  Labor  Standard.  —  Closely 
connected  with  the  labor-cost  standard  is  the  disu- 
tility of  labor  standard  proposed  by  Professor  J.  B. 
Clark.  The  disutility  of  labor  in  production  is  a 
different  thing  in  an  advanced  society  from  what 
it  is  in  a  primitive  economy.  In  the  latter  it  is  the 
pain,  toil,  and  sacrifice  caused  by  direct  labor ;  in 
an  advanced  society  it  is,  in  a  large  measure,  the 
indirect  disutility  caused  by  the  fact  that,  while 
personal  toil  is  less  in  amount  and  less  intense  in 
character,  the  producer  is  kept  from  enjoyment  of 
the  increasing  good  things  of  life  throughout  the 
period  of  production. 

The  marginal  disutility  of  labor  standard  re- 
quires the  return  of  goods  whose  marginal  utility 
is  equal  to  the  direct  and  indirect  disutility  of  fur- 
ther production.  All  disutility  of  marginal  labor, 
both  direct  and  indirect,  decreases  with  improve- 
ments ;  hence  this  standard  gives  an  increasing 
amount  of  commodities  for  a  constant  amount  of 
disutility  of  labor.  It  certainly  does,  therefore, 
distribute  the  benefits  of  man's  increasing  com- 
mand over  nature.  "  If  the  creditor,  in  making 
283 


MONEY 

the  loan,  gave  to  the  debtor  the  power  to  get  a 
hundred  commodities,  representing  a  hundred 
hours  of  labor;  and  if  the  debtor  at  the  end  of 
fifty  years  pays  to  his  creditor  money  that  will 
buy  a  hundred  and  ten  similar  commodities,  but 
was  earned  by  ninety  hours  of  labor,  the  gains 
from  progress  are  shared  in  a  way  that  is  prac- 
tically even."  l 

This  standard  is  applicable  where  the  creditor 
and  debtor  are  members  of  the  same  economic 
group,  in  the  sense  that  the  social  utility  and  the 
disutility  of  labor  are  the  same.  It  is  not  applica- 
ble, however,  between  societies  in  which  this  is  not 
the  case.  It  would  not  be  an  equitable  standard 
for  the  discharge  of  a  debt  by  an  American  if  the 
debt  were  due  to  a  Chinaman  in  China.  More- 
over, it  ignores  the  element  of  psychical  efficiency 
in  value.  A  change  of  taste  or  fashion  may  change 
the  effectiveness  of  goods  in  putting  creditor  and 
debtor  in  the  same  relative  position  in  the  scale  of 
social  welfare,  even  though  the  disutility  of  pro- 
duction of  those  goods  is  unchanged. 

16.  The  Marginal  Utility  Standard.  —  The  mar- 
ginal utility  standard  of  deferred  payments  calls 
for  a  return  of  equal  social  values  as  measured  by 
marginal  utilities.  This  standard  confronts  us  with 
several  serious  difficulties.  The  marginal  utility  re- 
ferred to  must  mean  that  of  the  composite  unit  of 
goods —  or  the  tabular  standard  unit —  to  society, 

1  John  K.  Clark,  "The  Gold  Standard  of  Currency  in  the  Light 
of  Recent  Theory,"  Pol.  Sci.  Quar.,  1895,  Vo1-  x-»  P-  398- 

284 


or  to  the  creditor,  or  to  the  debtor.  If  it  mean  the 
marginal  utility  of  goods  to  society,  this  is  indi- 
cated by  the  price  level,  or  the  amount  of  money 
which  will  buy  the  composite  unit  of  goods;  and 
the  standard  calls  simply  for  the  prevailing  money 
value  of  the  debt.  This,  however,  is  not  at  all 
what  the  standard  is  intended  to  accomplish. 
Moreover,  by  the  same  value  can  be  meant  only 
the  absolute  value  of  the  amount  loaned  at  the  time 
of  borrowing,  and  not  what  would  be  at  the  time 
of  payment  the  same  proportion  of  social  values 
as  the  debt  was  at  the  time  of  its  creation.  Hence, 
this  standard  would  not  restore  to  the  creditor  a 
value  that  would  place  him  in  the  same  relative 
place  in  the  scale  of  social  welfare  as  did  the  value 
he  loaned  at  the  time  of  the  loan.  What  is  wanted 
is  not  a  constant  value,  but  a  value  proportionate 
to  changing  social  values.  If  these  increase,  the 
debt  should  be  discharged  by  an  increased  amount 
of  value.  Otherwise,  either  creditor  or  debtor  will 
not  share  in  the  benefits  of  social  progress. 

17.  The  Total  Utility  Standard.  —  The  total  util- 
ity standard,  as  proposed  by  Professor  Ross,  is  es- 
sentially the  tabular  standard  with  an  amendment. 
According  to  this  standard,  "  the  debtor  is  not  to 
return  a  value  measured  in  labor,  nor  yet  a  value 
measured  in  commodities,  but  a  value  measured  in 
objective  utility.  And  with  industrial  progress  this 
is  secured  by  a  slight  excess  of  commodities."1 
This  slight  excess  of  commodities  is  given  to  en- 

1  E.  A.  Ross,  Annals  of  Amer.  A  cad.,  November,  1892,  p.  49. 
235 


MONEY 

able  the  creditor  to  share  in  the  benefits  of  progress, 
and  is  to  be  sufficiently  ample  "  to  compensate  him 
for  the  depreciation  of  that  portion  of  his  wealth 
devoted  to  satisfying  the  needs  of  his  social 
nature."  1 

Objection  might  be  made  to  this  standard,  in  the 
first  place,  on  the  ground  that  the  proposed  slight 
excess  of  commodities  is  not  definite  in  amount,  and 
that  the  standard  therefore  cannot  be  definite. 
The  slight  excess  might  be  a  very  different  amount 
in  the  judgment  of  different  people.  Waiving  this 
point,  however,  an  examination  shows  a  close  re- 
semblance of  the  total  utility  standard  to  the  com- 
modity standard,  as  exemplified  in  the  tabular 
standard.  The  tabular  standard  returns  the  abso- 
lute total  utility  borrowed,  minus  a  quantity  due  to 
the  depreciation  of  that  portion  of  the  goods  de- 
voted, as  Professor  Ross  says,  to  the  satisfaction  of 
the  social  nature ;  that  is,  minus  a  certain  amount 
of  what  we  have  called  the  psychical  efficiency  ele- 
ment of  utility.  This  standard  would  return  the 
utility  borrowed  without  that  diminution  ;  that  is, 
the  same  objective  utility.  By  this  can  be  meant 
only  units  of  utility  as  estimated  by  society  at  large, 
independent  of  peculiarities  in  the  subjective  wants 
of  individual  creditors  and  debtors.  In  other 
words,  the  units  of  utility  must  be  determined  with- 
out reference  to  the  wants  of  any  individual.  Pro- 
fessor Nicholson's  objection  to  Adam  Smith's  labor 
standard  might  well  be  made  here.  It  is  as  im- 

1  E.  A.  Ross,  Annals  of  Amer.  Acad.,  November,  1892,  p.  49. 
286 


STANDARD  OF  DEFERRED  PAYMENTS 

possible  to  estimate  utility  in  units  corresponding 
to  foot-pounds,  as  it  is  to  estimate  labor  in  such 
terms.  A  more  important  objection,  however,  may 
be  made.  The  return  of  the  same  objective  utility 
does  not  enable  the  creditor  and  the  debtor  to  share 
the  benefits  of  industrial  progress.  The  slight  ex- 
cess allowed  to  balance  the  diminution  of  the  psy- 
chical efficiency  element  of  utility  in  the  goods 
loaned  simply  enables  the  creditor  to  get  back 
what  he  loaned.  Suppose  that  the  total  volume  of 
social  utility  increased  during  the  period  of  the 
debt ;  increased,  that  is,  as  measured  in  some  ob- 
jective unit,  analogous  to  foot-pounds.  Such  a 
unit  might  be  the  number  of  heat  units  in  a  pound 
of  wheat.  If,  now,  100  pounds  of  wheat  are  loaned, 
the  loan  implies  the  transfer  of  IQOX  heat  units. 
If  the  total  social  utility  rise  from  one  million  to 
one  million  and  a  half,  during  the  period  of  the 
debt,  the  return  of  100  x  heat  units  to  the  creditor 
will  not  give  him  any  share  in  the  increase  due  to 
the  additional  half  million.  The  same  number  of 
heat  units,  or  foot-pounds,  is  a  smaller  proportion 
of  the  whole.  In  other  words,  there  is  a  surplus 
to  be  shared  between  the  creditor  and  the  debtor, 
altogether  irrespective  of  the  amount  allowed  for 
the  diminution  in  the  psychical  efficiency  of  the 
goods  borrowed. 

18.  The  Purchaser's  Surplus  Standard. — The 
purchaser's  surplus  standard  is  based  upon  the  idea 
that  the  satisfaction  obtained  by  the  purchaser,  over 
and  above  the  sacrifice  involved  in  his  expenditure, 

287 


MONEY 

gives  the  measure  of  his  position  in  the  scale  of 
social  welfare.  The  spenders  of  money  may  be 
arranged  in  rank,  according  to  the  amount  of  sur- 
plus satisfaction  which  they  obtain  from  the  ex- 
penditure of  the  same  amount  of  money.  The 
purchaser  of  goods  who  receives  no  such  surplus 
is  the  marginal  purchaser,  and  market  price  in  a 
competitive  market  is  fixed  by  him.1  The  least  effi- 
cient buyer,  in  other  words,  secures  no  advantage 
from  his  purchase.  He  has  no  gain  and  no  loss. 
Every  other  buyer  of  commodities  in  the  same 
market,  at  the  same  time,  secures  a  surplus  of 
satisfaction,  whose  amount  is  dependent  upon  his 
competitive  efficiency  as  a  purchaser.  He  has, 
therefore,  a  certain  position  in  what  we  may  call 
the  scale  of  purchasers,  and  his  surplus  satisfac- 
tion bears  a  definite  ratio  to  that  of  every  other 
purchaser  in  the  market. 

This  surplus  satisfaction  from  the  expenditure 
of  the  same  amount  of  money,  for  composite  units 
of  goods,  may  be  taken  as  an  index  of  the  wel- 
fare of  its  owners,  so  far  as  due  to  this  amount  of 
money.  Now,  what  we  are  aiming  to  do  is  to 
return  to  the  creditor,  at  the  time  of  payment,  such 
an  amount  of  wealth  as  will  make  his  purchaser's 
surplus  from  the  amount  returned  bear  to  that  of 
the  borrower  a  ratio  equal  to  that  borne  by  their 
respective  surpluses  when  the  loan  was  made, 

1  That  is,  by  him  alone  of  the  purchasers.  The  influence  of  the 
sellers,  being  the  same  for  all  the  purchasers,  may  be  here  taken 
as  constant. 

288 


STANDARD  OF  DEFERRED  PAYMENTS 

assuming  that  any  change  which  has  occurred  in 
the  value  of  the  debt  has  not  been  caused  by  the 
creditor  alone,  nor  by  the  debtor  alone,  but  rather 
is  a  social  change  which  is  to  be  shared  by  both 
as  members  of  society.  We  have  to  do  only  with 
the  sum  of  money  loaned.  A  change  in  the  for- 
tune either  of  creditor  or  of  debtor  we  cannot  take 
into  account.  Our  supposition  is  that,  so  far  as 
all  factors  of  individual  fortune  are  concerned,  the 
creditor  and  debtor  are  in  the  same  relative  posi- 
tions as  before.  The  only  change  that  has  oc- 
curred is  in  the  purchasing  power  of  the  amount 
loaned. 

When  the  price  level  changes,  the  surplus  of  all 
purchasers  changes.  Each  one  has  to  give  more 
or  less  for  the  same  amount  of  goods.  Now,  to 
any  individual  purchaser,  the  scale  of  marginal 
utilities  of  all  the  goods  he  buys  is  proportional 
to  the  scale  of  their  prices ; l  and  a  change  in  the 
scale  of  prices  will  induce  a  corresponding  change 
in  the  scale  of  marginal  utilities.  Hence,  under 
the  conditions  assumed,  the  buyer's  surplus  of  any 
individual,  after  a  change  in  the  price  level,  will 
bear  to  his  former  surplus  the  ratio  of  the  new 
price  level  to  the  old  ;  and  the  new  surplus  of  any 
buyer  will  bear  the  same  ratio  to  the  new  surplus 
of  any  other  buyer  as  the  old  surplus  of  the  first 
did  to  that  of  the  second. 

Now  a  rise  in  the   price  of   goods  takes  away 

1  Cf.  I.  Fisher,  "  Mathematical  Investigations  in  the  Theory  of 
Value  and  Prices,"  p.  37. 

u  289 


MONEY 


from  the  surplus  of  each  purchaser  a  certain 
amount,  which  is  not  the  same  for  all  individuals. 
It  diminishes  the  surplus  of  some  more  rapidly 
than  that  of  others.  In  the  diagram,  let  de,  fgt 
etc.,  represent  the  surplus  which  results  to  differ- 
ent purchasers  from  the  expenditure  of  a  given 


amount  of  money,  say  one  dollar,  on  one  scale  of 
prices.  The  surplus  utility  of  the  goods  bought 
with  a  dollar  will  be  largest  to  the  purchaser  who 
has  the  largest  amount  of  money,  because  to  him  a 
dollar  has  less  value  than  it  has  to  the  others.  A 
given  rise  of  prices  will  cut  off  a  larger  portion  of 
the  surplus  utility  of  some  purchasers  than  it  will 
of  the  others.  Let  it  cut  off  dm,  gn,  etc.,  for  the 
successive  purchasers.  The  surplus  utility  for  the 
series  is  now  represented  by  me,  nfy  etc.,  on  the  new 
price  level. 

For  the  sake  of  simplifying  the  problem,  let  us 
assume  for  the    moment   that   the    utility  curves, 
290 


STANDARD  OF  DEFERRED  PAYMENTS 

represented  by  bk  and  ak,  are  straight  lines.  Of 
course  this  cannot  be  true  of  actual  cases,  and  the 
assumption  represents  the  problem  at  what  the 
mathematicians  would  call  the  limit  of  variation. 
Under  this  assumption,  the  line  bk  cuts  the  paral- 
lels representing  the  surplus  of  utilities  of  pur- 
chasers proportionally  ;  so  that  ed  is  to  fg  as  em  to 
fn ;  that  is,  the  surplus  utilities  from  the  amount 
of  expenditure  in  question  would  have  the  same 
ratio  on  the  two  scales  of  prices,  and  the  debt 
would  be  fairly  discharged  with  an  amount  of 
money  which  was  to  the  amount  borrowed,  in  the 
ratio  of  the  price  levels.  But,  as  we  have  remarked, 
the  utility  curves  ak  and  bk  cannot  be  straight  lines. 
They  are  more  correctly  represented  by  the  dotted 
lines.  Hence  the  ratios  are  not  quite  equal,  and 
the  amount  of  money  to  be  paid  to  discharge  a 
debt  will  change  in  a  ratio  greater  or  less  than 
the  ratio  of  the  prices.  The  amount  of  money 
which  should  be  returned  is,  therefore,  the  new 
price,  with  an  addition  or  subtraction  sufficient  to 
allow  for  this  variation.  As  a  matter  of  fact,  the 
arrangements  existing  under  a  metallic  standard 
are  such  that  this  amendment  is  largely  automatic. 
It  is  brought  about,  as  we  shall  see,  by  a  fall  in  the 
rate  of  interest,  a  gradual  shortening  of  the  credit 
period,  and  the  diminution  of  price  oscillations 
through  a  refinement  of  speculation. 


291 


CHAPTER  XIV 

BIMETALLISM 

REFERENCES:  Barbour,  D.,  The  Theory  of  Bimetallism;  Cer- 
nuschi,  H.,  La  Monnaie  Bimetallique  ;  Darwin,  L.,  Bimetallism  ; 
Giffen,  R.,  The  Case  against  Bimetallism  ;  Jevons,  W.  S.,  Money 
and  the  Mechanism  of  Exchange,  Ch.  12;  Laughlin,  J.  L., 
History  of  Bimetallism  in  the  United  States ;  Laveleye,  E.  de, 
La  Monnaie  et  le  Bimetallisme  International ;  Nicholson,  J.  S., 
Money  and  Monetary  Problems,  Pt.  I.,  Ch.  8,  Essays  7,  8,  9 ; 
Scott,  W.  A.,  Money  and  Banking,  Chs.  14,  15  ;  Walker,  F.  A., 
International  Bimetallism  ;  White,  H.,  Money  and  Banking,  Ch. 
7  ;  Willis,  H.  P.,  History  of  the  Latin  Monetary  Union. 

1.  The  Nature  of  Bimetallism.  —  Besides  the 
efforts  to  find  a  suitable  standard  of  deferred 
payments  by  means  of  which  to  correct  the  harm 
done  by  the  changing  value  of  money,  proposals 
have  also  been  made  which  aim  to  make  such  a 
standard  unnecessary  by  obviating  or  minimizing 
changes  in  the  price  level ;  attempts,  not  to  repair 
the  supposed  mischief  which  such  things  cause, 
but  to  prevent  it.  One  of  the  methods  suggested 
for  doing  this,  bimetallism,  is  of  great  historical 
and  theoretical  importance.  It  is  important,  his- 
torically, because  it  has  been  practised  more  or 
less  extensively  at  different  times,  and  undoubtedly 
292 


BIMETALLISM 

has  succeeded  in  a  measure  in  preventing  the 
monetary  evils  that  would  in  its  absence  have 
arisen.  It  is  important,  theoretically,  because  the 
system  is  supported  by  arguments  which  are 
weighty,  and,  on  some  points,  convincing. 

Bimetallism,  as  its  name  implies,  is  a  monetary 
system  in  which  the  principal,  or  standard,  money 
is  composed  of  gold  and  silver  together,  instead  of 
either  alone.  According  to  this  system,  free  coin- 
age of  both  metals  is  established  at  a  fixed  ratio  of 
exchange.  Each  metal  is  to  be  unlimited  legal 
tender,  so  that  people  who  have  debts  to  pay  may 
have  the  option  of  paying  in  either  metal.  Con- 
sequently, if  either  metal  fall  in  value,  in  terms  of 
the  other,  debtors  will  be  free  to  take  the  bullion 
of  the  cheaper  metal  to  the  mints  and  have  it  coined 
at  a  legal  ratio,  which,  it  will  be  remembered,  is 
higher  than  the  market  ratio,  and  with  the  coins 
thus  obtained  to  pay  their  debts.  This  privilege 
would  give  the  debtor  the  advantage  of  paying  in 
a  cheaper  metal,  and  would  seem  to  be  against 
the  interest  of  the  creditor.  It  is  urged,  however, 
by  the  advocates  of  bimetallism,  that  the  creditor 
would  be  protected  by  the  fact  that  both  metals 
are  to  be  used  concurrently,  or  at  any  rate  alter- 
nately. It  is  further  urged  that  if  the  ratio  be 
properly  chosen,  and  the  system  established  over  a 
sufficiently  wide  area,  changes  in  the  ratio  would 
either  be  very  small  or  would  disappear  altogether, 
so  that,  in  either  case,  the  creditor  would  be  likely 
to  lose  little  or  nothing. 

293 


MONEY 

2.  The  Advantages  claimed  for  Bimetallism.  — 

The  advocates  of  bimetallism  insist  that  it  would 
obviate  many  of  the  evils  which  attach  to  a  mono- 
metallic monetary  system.  In  the  first  place,  they 
urge,  the  system  would  enlarge  the  stock  of  stand- 
ard money  and  thereby  lessen  fluctuations  of  the 
price  level.  For  the  larger  the  stock  of  money, 
they  say,  the  smaller  will  be  the  proportionate 
changes  in  its  value,  caused  by  additions  to  it,  or 
by  new  demands  for  it. 

It  is  also  urged  in  behalf  of  bimetallism,  that 
the  use  of  both  metals  would  cause  a  more  rapid 
increase  in  the  total  money  stock  than  could  come 
from  the  use  of  one  metal ;  and  that  the  increase 
in  the  amount  of  money  would  cause  its  value  to 
depreciate  slowly,  and  thus  furnish  a  gentle  but 
constant  stimulant  to  business.  For,  if  money  is 
depreciating,  so  that  expected  profits  are  constantly 
or  frequently  wiped  out  by  the  increase  in  the 
value  of  money,  trade  becomes  depressed  and  the 
spirit  of  enterprise  is  deadened.  While  there  is 
some  truth  in  this  contention,  yet,  as  we  have  seen 
in  another  connection,  there  are  counteracting 
forces  which  indicate  that  perhaps  too  much 
stress  has  been  laid  on  the  advantages  of  slow 
depreciation. 

In  the  next  place,  the  advocates  of  bimetallism 
bring  forward  historical  instances  of  falling  prices 
in  order  to  show  the  economic  evils  to  which  con- 
traction of  the  standard  money  subjects  the  com- 
munity. They  argue  that  in  such  periods  as  the 

294 


BIMETALLISM 

twenty-five  years  following  1873,  the  great  fall  in 
prices  was  due  to  the  use  of  gold  alone ;  that  the 
demand  for  that  metal  in  the  arts  increased  so  fast 
that  the  annual  production  was  not  enough  to 
maintain  the  old  price  level,  and  that  the  com- 
munity was,  therefore,  subjected  to  all  the  evils  of 
appreciation.  They  also  emphasize  the  injustice 
of  the  single  standard  to  debtors,  insisting  that  the 
burden  of  debts  is  increased  thereby. 

The  fourth  important  claim  which  the  advocates 
of  bimetallism  put  forth  is,  that  the  system  would 
keep  steady  the  par  of  exchange  between  countries 
which  trade  with  one  another.  It  is  a  well-known 
fact  that  a  country  which  has  a  depreciated  cur- 
rency has  to  pay  a  higher  price  for  its  imports,  in 
order  to  offset  the  depreciation  that  actually  has 
taken  place,  and  to  insure  the  foreign  importer 
against  the  risk  attendant  upon  possible  further 
depreciation.  At  present,  if  a  merchant  in  a  gold 
country  sells  a  cargo  of  goods  to  one  in  a  silver 
country,  the  silver  price  at  which  he  sells  them  is 
determined  by  the  rate  of  exchange  between  silver 
and  gold  on  the  date  of  the  sale.  He  asks  for  as 
many  silver  dollars  as  will  make  his  gold  price. 
When  the  cargo  arrives  and  the  time  comes  for 
payment,  however,  the  value  of  that  silver  dollar 
may  have  changed,  so  that  the  par  of  exchange 
between  the  two  countries  is  not  what  it  was  on 
the  day  of  the  sale,  and  a  loss  will  be  incurred  by 
one  of  the  exchangers.  The  uncertainty  attendant 
upon  this  fluctuating  exchange  is  so  great  that  it 

295 


MONEY 

might  seriously  affect  the  foreign  trade  of  the 
country.  Competition  is  so  keen  that  a  very  small 
margin  of  profit  will  decide  whether  or  not  certain 
goods  will  be  brought  from  a  particular  country,  or 
sent  to  a  particular  country.  With  a  depreciated 
currency  and  a  fluctuating  par  of  exchange,  a 
small  margin  of  profit  may  be  wiped  out,  or  so 
seriously  impaired  that  business  men  will  not  take 
the  risk  of  exporting  or  importing  goods.  There- 
fore any  means  of  keeping  the  par  of  exchange 
steady  would  be  an  advantage.  The  advocates  of 
bimetallism  claim  that  it  would  remove  this  element 
of  risk  from  business. 

3.  The  Maintenance  of  the  Chosen  Ratio  of  Ex- 
change between  Gold  and  Silver. — These  are  the 
principal  advantages  claimed  for  a  bimetallic  sys- 
tem. It  is  not  within  the  scope  of  our  work  to 
examine  the  historical  instances  in  which  bimetal- 
lism has  been  applied,  with  more  or  less  success. 
There  is  good  reason  for  believing  that  for  a  con- 
siderable number  of  years  much  good  was  done  by 
the  maintenance  of  the  bimetallic  system  in  France. 
There  are  reasons  for  believing,  however,  that 
the  good  was  more  apparent  than  real,  although  the 
disadvantages  caused  were  more  elusive  than  the 
benefits.  The  first  question  that  naturally  occurs 
to  one,  in  discussing  the  proposals  of  bimetallism, 
concerns  the  maintenance  of  the  ratio.  The  most 
rational  advocates  of  the  system  take  the  ground 
that  the  ratio  adopted  should  be  the  market  ratio 
prevailing  at  the  time.  It  would  be  necessary  to 

296 


BIMETALLISM 

choose  this  ratio,  or  one  very  near  it,  because  if  a 
different  one  were  chosen,  the  demand  for  the 
cheaper  metal  would  have  to  be  great  enough  not 
only  to  keep  its  price  up  in  the  face  of  a  large 
increase  in  its  production,  but  great  enough  also  to 
overcome  the  difference  between  the  market  ratio 
and  the  ratio  actually  chosen.  We  must  assume, 
in  fairness,  therefore,  that  the  ratio  chosen  will  be 
the  market  ratio.  Even  so,  however,  it  would 
seem,  at  first  thought,  that  the  ratio  could  not  be 
maintained  against  the  influence  of  Gresham's  law. 
We  know  that  ordinarily,  if  an  attempt  is  made  to 
circulate  two  metals  of  different  value  side  by  side, 
people  will  export  or  melt  down  the  dearer,  and 
use  the  cheaper  for  monetary  purposes.  It  would 
seem  that  this  procedure  would  make  bimetallism 
impossible.  Undoubtedly,  it  would  do  so,  if  the 
bimetallic  system  prevailed  in  only  one  country. 
It  is  claimed,  however,  that  if  the  system  were 
applied  over  a  sufficient  area,  if  it  were  adopted 
by  a  sufficient  number  of  commercially  strong 
nations,  Gresham's  law  would  be  neutralized,  and 
the  evils  of  constantly  changing  from  one  metal  to 
another  would  be  obviated.  In  support  of  this 
position,  it  is  urged  that  as  soon  as  one  metal  fell 
in  value,  or  showed  signs  of  falling,  the  demand 
for  it  would  increase,  the  demand  for  the  other 
metal  would  fall  off,  and  the  effect  would  be  to 
check  the  separation  of  the  values  of  the  two. 
Suppose,  for  example,  that  the  ratio  of  16  :  i  were 
adopted.  That  is,  for  one  ounce  of  gold  we  can 

297 


MONEY 

get  sixteen  ounces  of  silver.  If,  now,  the  market 
value  of  silver  falls,  a  given  amount  of  gold  will 
buy  more  silver  in  the  form  of  bullion  than  in  the 
form  of  coin.  Instead  of  using  the  gold  to  pay 
debts  and  purchase  goods,  people  will  now  buy 
silver  bullion  with  it,  and  have  this  silver  coined  to 
make  payments  with.  If  this  process  went  on 
long  enough,  it  would  seem  that  all  the  gold  would 
go  out  of  circulation.  During  the  process  the 
demand  for  gold  to  pay  debts  with  is  constantly 
growing  less ;  hence,  the  value  of  gold  would  tend 
to  fall.  Meantime  the  demand  for  silver  bullion, 
bought  with  the  gold,  tends  to  raise  the  market 
value  of  silver  in  terms  of  gold.  That  is,  the  in- 
creased demand  for  silver  tends  to  check  its  fall 
in  gold.  In  other  words,  the  contraction  of  the 
money  supply,  caused  by  the  withdrawal  of  the 
gold,  will  produce  a  fall  of  prices,  or  a  rise  in 
silver.  We  have,  therefore,  a  cheapening  of  gold, 
the  dearer  metal,  and  an  enhancing  of  the  value  of 
silver,  the  cheaper  metal.  The  two  movements, 
being  in  opposite  directions,  will  tend  to  keep  the 
metals  from  departing  very  far  from  their  estab- 
lished ratio  of  exchange,  and  may,  indeed,  prevent 
any  separation  at  all.  The  process  which  has  just 
been  described  is  known  as  the  compensatory 
action  of  the  double  standard.  There  is  some 
ground  for  the  opinion  that  the  oscillation,  or 
alternation,  of  the  standard  would  not  occur,  if 
bimetallism  were  universally  adopted,  but  that  the 
mere  prospect  of  such  a  change  would  be  dis- 

298 


BIMETALLISM 

counted  beforehand.  For,  the  advocates  of  bimet- 
allism insist,  the  larger  the  number  of  countries 
which  adopt  the  system,  the  more  powerful  will  be 
the  forces  at  work  tending  to  prevent  a  change  of 
the  relative  values  of  the  two  metals.  The  claim 
is  undoubtedly  sound.  If  three  countries  have 
gold  monometallism,  the  transfer  of  one  gold  mono- 
metallic country  to  the  bimetallic  group  not  only 
reduces  the  demand  for  the  dearer  metal,  but  at 
the  same  time  increases  the  demand  for  the  cheaper 
metal.  Every  addition  of  monometallic  countries 
to  the  bimetallic  group  would  strengthen  that  group 
much  more  than  in  the  proportion  of  the  number 
of  countries  added.  In  the  last  analysis,  of  course, 
the  steadiness  of  the  ratio  between  the  two  metals 
depends  upon  the  rate  of  increase  of  the  cheaper 
metal ;  but  it  is  doubtful  whether  the  rate  of  in- 
crease would  ever  be  fast  enough  to  outrun  the 
increase  in  the  demand  for  the  metal  whose  value 
is  falling.  Hence,  with  bimetallism  universal,  or 
general,  the  ratio  might  be  maintained. 

4.  Some  Factors  adverse  to  the  Maintenance  of 
the  Ratio.  —  There  are  certain  considerations,  how- 
ever, which  modify  the  conclusion  of  the  last  para- 
graph. As  societies  grow  stronger  and  richer,  the 
scale  of  incomes  and  prices  tends  upward,  and  this 
fact  has  an  important  bearing  on  the  steadiness  of 
the  ratio  of  exchange  of  the  two  metals  under 
bimetallism.  For  a  higher  scale  of  prices  and  in- 
comes calls  for  the  use  of  a  dearer  metal  as  money, 
a  metal  with  a  higher  monetary  utility,  with  high 
299 


MONEY 

value  in  small  bulk.  For  this  reason,  as  communi- 
ties became  richer,  the  demand  for  gold  would 
doubtless  increase.  The  monetary  utility  of  silver, 
the  cheaper  metal,  would  decrease,  and  its  service- 
ableness  to  richer  communities  would  become  less; 
hence  the  demand  for  it  for  general  use  would 
diminish.  If,  now,  under  a  bimetallic  system,  the 
supply  of  gold,  the  dearer  metal,  should  increase, 
as  communities  became  richer,  the  effect  would  be 
to  lower  the  value  of  the  whole  mass  of  the  money 
material.  Under  these  circumstances  the  value  of 
silver  would  fall  with  that  of  gold,  and  the  ratio  of 
exchange  between  the  two  metals  would  not  be 
likely  to  change  very  much.  It  is  possible,  how- 
ever, that  the  decrease  in  the  demand  for  silver, 
due  to  its  inferior  monetary  utility,  under  the  con- 
ditions supposed,  would  offset,  in  whole  or  in  part, 
the  tendency  of  debtors  to  make  payments  in  sil- 
ver. For  the  real  cheapness  of  a  money  material 
in  a  given  society  depends  not  only  on  its  cost  of 
acquisition,  but  also  on  its  monetary  efficiency. 

If,  on  the  other  hand,  the  supply  of  the  cheaper 
metal,  silver,  should  increase,  the  value  of  the 
whole  monetary  mass  would  fall  farther  than  be- 
fore, and  the  demand  for  silver  for  payments  would 
decrease,  while  that  of  gold  would  increase,  since 
its  monetary  utility  would  be  higher.  Conse- 
quently the  metals  would  separate  in  value,  be- 
cause the  influence  of  the  demand  for  the  money 
of  the  greater  monetary  utility  would  be  against 
the  maintenance  of  the  ratio  under  conditions 
300 


BIMETALLISM 

which  increased  the  supply  of  the  cheapening 
metal.  Therefore,  an  increasing  demand  for  a 
money  material  of  a  higher  monetary  utility  is 
bound  to  work  against  the  demand  for  a  cheaper 
metal  by  debtors,  and  lessen  the  influence  of  that 
demand  in  retarding  the  fall  of  the  price  of  the 
cheaper  metal,  and,  in  so  far,  again,  defeat  the  pur- 
pose of  the  bimetallic  system.  However,  the 
causes  just  described  would  operate  thus  only 
during  a  period  of  rapidly  increasing  wealth.  Dur- 
ing prolonged  periods  of  slow  economic  develop- 
ment the  ratio  of  exchange  between  the  metals 
might  be  kept  steady. 

5.  Bimetallism  and  Fluctuations  of  the  Price 
Level.  —  If  we  admit  that  the  ratio  can  be  main- 
tained in  the  bimetallic  system,  and  that  bimetal- 
lism is  therefore  practicable,  it  remains  to  consider 
whether  the  advantages  claimed  for  it  are  really 
attainable,  and  of  as  great  importance  as  bimetal- 
lists  have  claimed.  There  is  little  doubt  that  a 
steady  ratio  would  keep  the  value  of  the  metals 
approximately  constant  with  reference  to  each 
other,  but  would  it  keep  the  value  of  both 
steady  with  reference  to  goods  ?  It  is  claimed 
that  an  increase  of  the  volume  of  money  would 
diminish  the  fluctuations  of  the  price  level  on 
the  theory  that  a  larger  volume  of  money  is 
less  sensitive  to  changes  in  supply  and  demand 
than  is  a  smaller  quantity.  Water  which  is  suffi- 
cient to  overflow  a  pond  would  scarcely  be  noticed 
in  Lake  Michigan  or  the  ocean ;  and  a  drouth 

301 


MONEY 

which  would  dry  up  the  pond  would  lower  the 
level  of  the  lake  but  a  fraction,  and  that  of  the 
ocean  not  at  all.  So,  it  is  argued,  the  larger  vol- 
ume of  money  will  show  fewer  changes  of  value 
by  reason  of  an  increasing,  or  a  lessening,  demand 
for  it  in  the  shape  of  goods ;  and  a  smaller  change, 
also,  from  an  increasing  supply  of  the  metal  due 
to  changing  conditions  of  production.  For  it  is 
not  unlikely  that  what  we  may  call  the  accidents 
of  mining,  whereby  one  metal  or  the  other  is  pro- 
duced in  unusually  large  quantities  for  a  time,  may 
offset  one  another.  When  a  new  gold  mine  is  dis- 
covered, the  production  of  silver  may  decrease, 
and  vice  versa. 

The  argument  adduced  in  favor  of  bimetallism 
goes  to  show  that  in  all  probability  the  degree  of 
fluctuation  of  changing  prices  would  be  less,  but 
that  the  fluctuations  would  be  greater  in  number, 
provided  the  conditions  prevailing  at  the  time  the 
system  was  put  in  operation  continued.  That  is  to 
say,  if  the  demand  for  the  medium  of  exchange 
remained  about  the  same,  and  its  supply  were  in- 
creased, as  it  would  be  under  the  bimetallic  system, 
obviously  the  degree  of  change  in  the  value  of  the 
medium  of  exchange  would  be  lessened.  This 
would  be  true  not  only  because  of  the  increase  in 
the  mass  of  exchange  medium,  but  because  prices 
would  always  follow  the  cheaper  metal,1  since  it  is 
with  the  cheaper  metal  that  payments  are  made. 
If  the  system  succeeded  at  all,  then,  strictly  speak- 

1  Cf.  Jevons,  "  Money  and  the  Mechanism  of  Exchange,"  p.  138- 
302 


BIMETALLISM 

ing,  the  standard  of  value  would  alternate  from 
one  metal  to  the  other  with  every  variation  in  the 
ratio  of  exchange  of  the  metals.  Prices  will  not 
soar  so  high  as  the  value  of  the  cheaper  metal 
would  make  them  go  if  it  were  used  by  itself,  nor 
so  low  as  the  value  of  the  dearer  metal  would 
drive  them  if  it  alone  were  in  use.  Therefore  the 
fluctuations  would,  probably,  be  of  smaller  range, 
but  of  greater  frequency.  It  is  claimed,  however, 
that  frequent  small  changes  would  be  less  detri- 
mental to  business  than  a  smaller  number  of 
changes  of  considerable  magnitude.  This  claim 
is  of  very  doubtful  validity.  For  the  period  of  a 
large  volume  of  debts,  and  of  by  far  the  greater 
number  of  productive  and  mercantile  transactions, 
is  short  —  too  short  to  be  seriously  affected  by 
a  change  of  much  magnitude  in  the  purchasing 
power  of  money.  The  time  necessary  for  such  a 
change  would  overlap  a  series  of  periods  of  debt 
and  of  manufacturing  and  trade  activity.  To  in- 
crease the  number  of  fluctuations  of  the  price  level 
would  be  to  introduce  some,  or  many,  within  the 
debt  periods  and  the  cycles  of  production  and 
trade.  Business  would  be  exposed  to  more  uncer- 
tainty by  such  procedure,  and  such  changes  would 
be  harder  to  forecast  and  to  discount  than  would 
be  a  change  in  one  direction  through  a  portion  of 
its  progress. 

Moreover,  even  if  frequent  small  changes  were 
less  harmful  than  occasional  large  ones,  it  is 
questionable  whether  the  condition  of  greater  fre- 

3°3 


MONEY 

quency  and  less  degree  could  be  permanent.  The 
argument  which  supports  it  ignores  the  influence 
of  the  supply  of  goods  on  prices.  The  upward 
impulse  which  the  bimetallic  system  would  give 
to  the  price  level  would  in  time  stimulate  industry, 
and,  by  increasing  the  supply  of  products,  bring 
about  a  new  fall  of  prices.  It  is  very  likely  that 
under  the  modern  system  of  credit,  the  impulse 
given  to  production  by  a  rise  of  prices  might 
cause  an  expansion  that  would  overshoot  the  mark, 
and  thus  produce  a  reaction  that  would  more  than 
offset  the  gain  which  had  been  made.  Although, 
then,  bimetallism  would  probably  give  a  higher 
range  of  prices,  at  least  at  first,  there  is  no  reason 
whatever  for  assuming  that  the  higher  level  would 
be,  in  the  long  run,  any  steadier  than  the  one 
which  it  supplanted. 

6.  Bimetallism  as  a  Relief  from  the  Burden  of 
Debts.  —  If  the  argument  just  set  forth  is  correct, 
it  follows  that  the  claim  that  bimetallism  would 
relieve  debtors,  loses  much  of  its  force.  The  real 
cause  of  hardship  to  debtors,  the  thing  which  the 
argument  for  bimetallism  assumes  to  be  of  greatest 
importance,  is  not  a  high  or  low  level  of  general 
prices,  but  the  changes  in  these.  The  mere  fact 
that  the  price  level  is  high  or  low  is  not,  of  itself, 
important  for  either  debtor  or  creditor,  for  pro- 
ducer or  consumer ;  but  the  change  from  one 
price  level  to  another  is  a  very  different  matter. 
Now,  in  so  far  as  bimetallism  failed  to  restore  the 
old  price  level  completely,  it  would  fail  to  justify 

3°4 


BIMETALLISM 

its  adoption ;  for  it  would  simply  substitute  a  new 
series  of  changes  in  the  value  of  money,  reckoned 
from  a  higher  base  line  of  prices.  Nor  could 
bimetallism  correct  these  transient  variations  in 
prices  which  are  due  to  the  oscillations  of  credit. 
Indeed,  it  is  not  unlikely  that  the  larger  money 
reserve  which  bimetallism  must  bring  into  use,  in 
order  to  be  successful,  would  produce  an  extension 
of  credit  that  would  increase  the  number  of  these 
transient  variations.  Moreover,  the  effect  of  a 
change  in  the  demand  for  either  one  of  the  metals 
could  not  be  felt  over  the  whole  bimetallic  area  at 
once.  It  would  be  felt  in  one  place  sooner  than 
in  another.  There  would  be  opportunity,  there- 
fore, for  loss  or  gain  on  transactions  between 
places  in  which  the  effect  is  first  felt  and  those 
which  the  movement  reached  later.  Like  the 
effects  of  a  new  supply  of  money,  every  variation 
under  the  bimetallic  system  would  propagate  it- 
self, as  it  were,  by  jerks,  and  the  results  would  be 
unequal  in  different  places.  But  it  is  of  the  es- 
sence of  the  system  that  it  must  operate  over  a 
large  area.  Consequently,  it  would  be  much  less 
likely  to  be  of  service  to  particular  classes  of 
debtors,  or  to  particular  communities. 

In  the  interest  of  debtors,  it  is  important  to 
determine,  also,  what  price  level  bimetallism  would 
establish.  Would  it  be  the  price  level  of  five 
years  before  the  adoption  of  the  system,  or  that 
of  ten  years  before  ?  No  evidence  has  ever 
been  adduced  to  show  that  the  price  level  which 
x  305 


MONEY 

the  bimetallic  system  would  establish  would  be 
that  which  it  was  desired  to  restore.  A  larger 
volume  of  money  might  raise  prices,  but  a  defi- 
nite increase  is  necessary  to  raise  them  to  a  par- 
ticular level.  Now  it  is  impossible  to  show  that 
the  increased  amount  of  money  which  the  adop- 
tion of  bimetallism  would  put  into  circulation 
would  restore  the  price  level  of  any  particular 
year,  or  of  any  particular  decade.  Debts  are  not 
all  of  the  same  age.  The  restoration  of  the  prices 
of  one  year,  therefore,  might  prevent  loss  on  debts 
contracted  in  that  year,  but  it  would  not  do  so 
for  the  debts  of  longer  or  shorter  standing.  Con- 
sequently, it  is  impossible  that  the  price  level 
established  by  the  bimetallic  system  could  restore 
just  relations  between  all  debtors  and  their  cred- 
itors. If  it  overshot,  or  undershot,  the  old  price 
level,  it  would  transfer  from  one  party  to  the 
other  whatever  burden  the  change  involved.  The 
system  might,  indeed,  check  a  fall,  and  substitute 
a  rise,  in  the  value  of  money ;  but  it  offers  no  plan 
for  controlling  the  extent  of  the  rise,  or  of  insur- 
ing that  it  shall  go  only  far  enough  to  be  just,  and 
no  farther.  At  best,  the  system  could  only  be  a 
palliative  of  any  hardships  caused  by  debts  on  a 
falling  price  market. 

7.  Bimetallism  would  not  provide  a  Slowly  De- 
preciating Currency. —  There  is  no  assurance  that 
the  bimetallic  system  would  stimulate  business  by 
furnishing  a  slowly  depreciating  currency.  Aside 
from  the  fact  that  the  importance  of  such  stimula- 


BIMETALLISM 

tion  is  usually  exaggerated,  the  stimulus  given  to 
production  might  cause  the  supply  of  goods  to 
gain  upon  the  supply  of  money,  and  in  that  way 
check  depreciation.  The  fall  of  value  of  the  whole 
mass  of  money  material  caused  by  the  use  of  the 
two  metals  would  act  as  a  check  on  the  production 
of  both,  and  retard  any  increase  in  their  supply. 
The  supply  being  practically  constant,  or  of  slow 
increase,  while  the  volume  of  products  constantly 
swelled,  the  value  of  the  money  mass  would  rise  in 
time,  and  the  world  would  then  have  another  era 
of  monetary  appreciation,  with  a  greater  distance 
for  prices  to  fall.  The  tremendous  amount  of  the 
annual  production  of  both  gold  and  silver  in  recent 
years  lends  countenance  to  this  argument.  For 
the  new  supply  has  undoubtedly  had  considerable 
effect  in  lowering  their  value,  and  to  check  this 
production  would  check  that  fall. 

8.  Obstacles  to  International  Bimetallism.  — 
Bimetallism,  to  achieve  any  success  at  all  in  steady- 
ing the  ratio  of  exchange  between  silver  and  gold, 
would  have  to  be  international  in  its  scope.  This 
requirement  interposes  insuperable  obstacles  to  its 
adoption.  International  prejudice,  the  patriotic 
desire  of  the  people  of  each  country  to  have  their 
own  system  of  coinage,  the  difficulty  of  changing 
the  ratios  of  coinage  already  existing  in  different 
countries,  the  shock  to  credit,  and  the  disturbance 
which  the  change  would  produce  in  existing  con- 
tracts and  prices,  as  well  as  many  other  causes, 
stand  in  the  way  of  the  necessary  international 
3°7 


MONEY 

agreement.  If  a  country  which  was  poor  and 
economically  backward  at  the  time  of  the  adop- 
tion of  the  system  became  rich  and  economically 
strong,  its  people  would  need,  and  would  try  to 
secure,  the  metal  of  higher  monetary  utility.  But 
the  international  agreement  would  stand  in  its  way 
and,  in  a  measure,  check  its  industrial  progress. 
Such  a  country  would  be  impelled  to  break  away 
from  the  system,  and  adopt  the  metal  best  suited 
to  its  changed  condition.  This  was  the  experi- 
ence of  France.  In  1803  she  adopted  the  system 
of  free  coinage  of  both  metals  at  the  ratio  of 
15^  parts  of  silver  for  one  part  of  gold.  For 
nearly  half  a  century,  the  conditions  of  demand 
and  supply  were  such  that  the  ratio  was  fairly 
well  maintained,  and  the  policy  of  France  conferred 
on  the  world  whatever  benefits  this  steadiness  of 
ratio  offers,  but  at  the  expense  of  her  own  people. 
The  change  in  the  relative  values  of  the  two  metals, 
caused  by  the  discoveries  of  gold  in  Australia  and 
California,  made  it  impossible  for  France  to  per- 
severe in  her  policy,  except  at  a  tremendous  cost 
to  herself.  She  was  compelled  to  debase  her 
fractional  silver  in  order  to  save  it,  and  in  1865 
joined  with  Switzerland,  Belgium,  and  Italy  to  form 
what  is  known  as  the  Latin  Union,  for  the  mainte- 
nance of  the  bimetallic  system.  Under  this  union 
the  great  bulk  of  the  coinage,  especially  of  the 
principal  coins,  was  gold.  The  monetary  utility 
of  silver  was  too  low  for  economical  use  in  France 
under  the  changed  conditions.  So  her  people  saw, 
308 


BIMETALLISM 

with  equanimity,  her  principal  coins  changed  to 
gold.  When,  a  few  years  later,  the  ratio  of  ex- 
change turned  again  in  favor  of  silver,  and  gold 
once  more  became  dearer,  France  protected  her- 
self against  the  loss  of  the  money  of  higher  utility, 
because  her  industrial  condition  required  a  money 
convenient  for  large  payments.  Such,  too,  was  the 
experience  of  the  United  States,  and  such,  it  would 
seem,  would  be  the  experience  of  every  progressive 
country,  even  under  international  bimetallism. 

Finally,  the  arbitrary  violation  of  all  existing 
contracts  by  the  establishment  of  bimetallism  is 
a  serious  objection.  Even  if  much  of  the  claim 
were  true,  that  gold  monometallism  at  times  bears 
harshly  on  debtors,  it  is  more  than  doubtful 
whether  the  evil  effects  of  the  arbitrary  violation 
spoken  of  would  not  create  far  greater  hardships. 
The  inviolability  of  contracts  is  an  essential  con- 
dition of  progress.  In  the  interests  of  business  se- 
curity and  development,  they  must  be  kept,  even 
when  to  keep  them  is  an  unexpected  hardship  on 
one  of  the  parties. 

9.  The  Increase  in  Gold  and  the  Bimetallic  Agi- 
tation.—  The  progress  of  events  in  recent  years 
has  quieted  the  demand  for  the  establishment  of 
bimetallism.  The  production  of  gold  has  increased 
so  rapidly  that  the  most  ardent  advocates  of  mone- 
tary expansion  have  every  reason  to  be  more  than 
satisfied  with  the  situation.  It  is  not  improbable, 
indeed,  that  the  volume  of  money  is  greater  than 
it  would  be,  if,  without  the  extension  of  gold  pro- 
3°9 


MONEY 

duction,  the  world  were  living  under  the  bimetallic 
regime. 

This  progress  in  the  production  of  gold,  how- 
ever, is  not  an  accident.  It  is  doubtful  whether  it 
is  a  proper  use  of  language  to  say  that  there  ever 
was  any  real  scarcity  of  gold  in  the  period  of  fall- 
ing prices  after  18^3.  The  true  explanation  of 
falling  prices,  as  has  already  been  said,  is  rjrob- 
ably  to  be  found  in  the  fact  that  whatever  loss  the 
worTcTTuWeTe&TTrom  falling  prices  was  not  enough 
to  offSeTuie  gain  received  from  expanding  pro- 
duction, so  l:riaTTt'  "paTcT't&  let  jgnees  fall  ratheT 
than  to  turn  capital  to  producing  gold.  As  soon 
as  the  point  was  reached  where  the  profit  from 
expanding  production  was  not  great  enough  to 
offset  the  loss  from  the  appreciation  of  gold,  it 
became  profitable  to  turn  part  of  the  capital  which 
had  been  hitherto  devoted  to  producing  other 
things  to  the  production  of  more  gold.  The  inven- 
tive genius  of  mankind  was  turned  to  the  solution 
of  the  problem,  and  gave  the  world  chemical  and 
mineralogical  discoveries  which  have  increased 
the  world's  stock  of  money  far  beyond  the  dreams 
of  the  bimetallist.  The  movement  has  been, 
therefore,  the  result  of  curative  causes  whose  op- 
eration bimetallism  would  have  checked.  The  in- 
crease of  the  supply  of  gold  has  come  about,  in 
a  sense,  automatically,  in  response  to  increased 
pressure  for  more  exchange  medium.  The  es- 
tablishment of  bimetallism  would  ha^e  been,  so 
to  speak,  an  artificial  cure  of  the  difficulty,  and, 

310 


BIMETALLISM 

like  Qi^her  artificial  cures  of  social  ills,  jt  probably 
would  haye  created  "difficulties^ of  its  own.  Indeed, 
we  might  say  that  the  conclusion  of  the  whole 
matter  is,  that  vwhile  bimetallism  would  unde- 
niably offer  some_  ajivantages,  it  is  more"  than 
questionable  whether  these  would  noTT^offs^t. 
byTfre  evils  which  it~"wouIcT7ail  to  cure,  added 
to  those  of  which  iF  wouToT'Itselt  Be"  the"  "direct 
causeT~ 

10.  Symmetallism.  —  In  its  original  form,  bi- 
metallism contemplated  the  separate  use  of  gold 
and  silver  jn_the  form  of  coins.  A  modification 
of  this  plan  has  been  af~va"rlous  times  proposed 
whereby  the  J:wo  metals  would  be  united  in  a 
single  coin,  in  some  prorjortion7  sucrT,Tbr  example, 
as"  that  indicated  bythe  ratio  estabj^KecT^rjetween  / '  • 
them.  That  is,  instead  oT  calling  23.2  grains  of  ,f4f 
gold,  or  371.25  grains  of  silver,  one  dollar7.~we 
migjvt^s^ythat^^.^  grains  of  gold  and  115.6 
grains  ofsilver  make  ^dollar.  This  sy  stem_js 
known  as  jsymmetallisnj.  It  is  drrrTcult  to  say 
whataH^antage  this  plan  has  over  the  simpler 
bimetallic  method.  It  would  give  us  a  system 
cumbersome  and  complicated  for  making  pay- 
ments, if  the  value  of  either  metal  should  change; 
and  it  would  offer  opportunities  for  the  abuse  of 
coinage  by  governments  that  were  not  overscru- 
pulous in  the  matter.  Variations  in  the  value  of 
coins  due  Jo  wear  and  tear  would  be  difficult  to 
detect,  and  the  poor  and  ignorant  would  be  more 
easily  imposed  upon?"  Practical  difficulties  of 

311 


MONEY 

coinage  also  would  stand  in   the   way,  and   alto- 
gether the  system  has  little  to  commend  it. 

11.  Wfty-fometaJ|lism.  —  More  scientific  and  prac- 
tical is  the_  more  -rpgpnt  form^oj  bimetallism, 
or  neo-bimetallism,  as  it  is  called.  According  to 
the  neo-bimetallist,  the  best  way  would  be  to 
issue  paper  ^urfericy-tlas'^d  uporT  g"ol67~and "silver*. 
Notes  of  given  denominations  would  call  for  gold 
or  silver^  at  the  option  of  the  holder.This  plait 
would  give  tke  puT>lll  ail  Lhtf  dd  Vantage  that  comes" 
from"  The  use  of  paper  money,  and  would  at  the 
same  time  not  interfere^with  the  working'  of  the 
bimetallic  jylstem  if~it  should  Ije  adoptecT 

Instead  ot  bimetallism  at  a  fixed  ratio,  the  free 
coinage  of  gold  ancT'silverjit  shifting  ratios  has 
been  suggested.  After  what  has  been  said  of  "the 
simpler  form  of  bimetallism,  little  need  be  added 
about  this  proposal.  It  does  not  avoid  any  of  the^ 
disadvantages  of  free  coinage  at  a  fixed  ratio,  and 
it  introduces_new  eIem^nts~"oT  "uncertainty  and 
variation.  The  system  would  be  complicated, 
and  impossible  of  regulation.  For  it  would  require 
constantgovernment  super  vision  ^of_grice  changes, 
implying  a  knowledge  of  business  movements,  and 
a  power  to  forccast^rheir  errects,  that  no  govern- 
ment could  by  any  possibility  possess.  The  plan 
assumes  the  possibility  of  offsetting,  by  momentary 
acts,  a  series  of  forces  acting,  through  a  period, 
without  any  known  relation  between  these  forces 
and  the  act.  This  is  impossible.  The  forces 
might  cease  to  act  before  the  remedy  was  applied, 
312 


BIMETALLISM 

or  they  might  then  be  operating  in  an  opposite 
direction,  and  the  situation  would  be  made  worse. 
The  _plan__p_resupposes,  too,  common  action  by 
different  countries.  But  if  the  nations  of  the 
world~  cannot  agree  to  establish  international  bi- 
metallism in  its  simple  form,  they  will  certainly 
never  adopt  a  scheme  against  which  exist  all 
the  reasons  for  their  refusal  in  the  other  case, 
together  with  many  which  spring  from  the  com- 
plex and  changing  conditions  under  which  free 
coinage  at  a  shifting  ratio  would  have  to  be 
administered. 

12.  Commissions  to  regulate  the  Price  Level.  — 
Akin  to  bimetallism  in  its  purpose  is  the  proposal 
which  has  sometimes  been  made  to  keep  prices 
steady  by  the  injection  or  withdrawal  of  money 
from  circulation  at  intervals,  as  prices  fall  or  rise.. 
To  carry  out, this  proposal  it  is  suggested  that  a 
gpyejrnment  commission,  nationaljor  international 
be_  established,  whose  duty_shall  be  to  compile, 
tables  of  index  numbers  as  a  means  of  measuring 
the  price  changes.  A  base,  is,  to  be  selected,  con- 
sistingj  for  example,  of  the  average  of  prices  for  a 
series  of  years.  This  average  is  to  be  called  ioq,_ 
afiaT  changes  in  the  level  are  to  be  computed  peri- 
odically. According  to  the  direction  in  which  the 
price  level  has  changed,  the  commission  will  then 
add  or  withdraw  money  from  circulation. 

The  jproposal  is,  in  substance,  an  attempt  to 
create  a  money  whose  value  would  be  invariable, 
and  it  rests  for  support  upon  the  crudest  form  of 


MONEY 

the  quantity  theory  of  money.  It  is  a  na'fve  con- 
ception, as  has  been  remarked,  that  the  addition  or 
subtraction  of  currency  necessarily  has  any  effect 
whatever  on  the  price  level,  or_that  there  is  any 
direct  relation_between_its_^uppry  and  the  value  of 
standard  money.  It  is  equally  nai've  to  suppose 
that  it  would  be  possible ^to  get  a  commission  wise 
enough,  or  honest  enough,  to  carry  such  a  project 
fHrough  successFully  for  a  considerable  pericjHTof 
time.  The  history  of  the  conduct  of  governments 
in  the  regulation  of  money  does  not  inspire  one 
with  confidence  in  their  possession  of  either  the 
ability_or_ _the  hjmesty_to_^drnin.ister  such  a  plan. 
But  we  do  not  need  to  rest  our  rejection  of  the 
scheme  upon  the  difficulty  of  securing  an  honest 
and  wise  commission,  for  the  plan  is  unsound  in 
theory.  This  commission  must  injecland  withdraw 
either  standard  money  or  government  jiaper.  ^f 
it  aSTIecfjpvernment  paper  to  the  circulation  of  a 
pTrticujar^^countrj^  it  would_  drivV~out_  standard 
money,  and  no  effect  would  be  produce]^  on  prices^ 
but  the  country  would  soon  be  brought  to  an  irre- 
deemable papSr  b'dsTs' TT7~on'  tRe^ other  handTtFTe 
commission  injectecT'or  withdrew  standard  money, 
where  would  it  get  this  money  ?  It  must  obtain 
money  either  by  taking  it  out  of  circulation,  by 
taxatip.il,  or  by  the  sale  of  bonds,  or  else  the  govern- 
mcnt  musjL~j^.nTrcT  thc~pro'duict  of  Jfie^  mines.  In 
either  case  the  plan  would  cause  the  very  condition 
wTnrb  ii-~'in-t9fldei3Lto  prevent  or  Jto. remedy.  To 
take  the  money  out  of  circulation  would  be  to 
3'4 


BIMETALLISM 

contract  the  currency,  in  order  later  to  expand  it. 
To  control  the  production  of  the  mines  would  be 
to  withhold  the  supply  of  money,  in  order  later 
to  contract  or  expand  it.  If  the  amount  of  gold 
added  to  the  existing  stock  from  year  to  year  were 
not  sufficient  to  prevent  a  fall  of  prices,  how  could 
it  be  made  sufficient  simply  by  passing  it  through 
the  hands  of  a  commission  ? 

It  has  been  suggested1  that  international  paper 
money,  issued  in  quantities  sufficient  to  neutralize 
the  causes  of  fluctuation  as  soon  as  they  should 
arise,  would  retain  a  constant  value  and  thereby 
keep  the  general  price  level  steady.  But  the  pro- 
posed plan  takes  no  account  of  causes  of  price 
changes  arising  on  the  side  of  goods.  It  is  not  the 
case  that  a  change  in  the  money  supply  will  re- 
verse such  changes,  irrespective  of  their  source 
and  causes.  The  addition  or  subtraction  of  a  given 
quantity  might  merely  alter  the  relation  between 
the  volume  of  exchanges  settled  by  cancellation 
through  credit  paper  and  the  volume  settled  by 
direct  money  payments,  without  affecting  the  price 
level  at  all.  In  short,  as  already  said,  price  move- 
ments cannot  be  reversed  by  action  that  has  no 
regard  to  their  causes,  nor  can  occasional  action 
neutralize  the  effects  of  varied  forces  acting  con- 
tinuously and  in  constantly  changing  directions. 
If  at  any  time  a  quantity  of  money  were  injected 
to  cure  appreciation,  there  would  be  no  means  of 

1  Gide,  "  Principles  of  Political  Economy,"  2d  Amer.  ed.,  Transl. 
by  Veditz,  p.  227,  foot-note. 

315 


MONEY 

knowing  whether  the  movement  that  had  caused 
appreciation  had  come  to  a  stop  before  the  injec- 
tion was  made,  or  whether  it  was  to  continue,  or 
whether  the  current  of  events  was  to  change  and 
depreciation  set  in.  Consequently,  a  commission 
would  be  setting  in  motion  a  force  inadequate  to 
cure  the  alleged  difficulty  without  any  knowledge 
whether  it  would  continue,  or  be  replaced  with  a 
force  of  an  opposite  character.  Therefore  the 
addition  or  withdrawal  of  a  given  quantity  of 
money  at  any  time  would  be  as  likely  to  aggravate 
as  to  remedy  the  difficulty  it  was  intended  to  cure. 
Moreover,  a  measurement  of  the  price  changes  by 
means  of  index  numbers  is  a  necessary  feature  of 
the  scheme,  and  what  has  been  said  in  criticism  of 
this  method  of  measurement  would  be  valid  against 
this  plan.  The  plan  is  an  excellent  one  to  pro- 
mote speculation  in  stocks,  and  to  put  the  money 
market  at  the  mercy  of  gamblers  ;  but  it  could  have 
only  a  vicious  effect  on  legitimate  business. 


316 


CHAPTER  XV 

SOME  FACTORS  WHICH   MODIFY  THE  INFLUENCE 
OF   PRICE   CHANGES 

REFERENCES  :  Clark,  J.  B.,  The  Gold  Standard  of  Currency  in 
the  Light  of  Recent  Theory,  Pol.  Sci.  Quar.,  September,  1895; 
Emery,  H.  C.,  The  Place  of  the  Speculator  in  the  Theory  of  Distribu- 
tion, Amer.  Econ.  Assoc.  Pub.,  3d  Ser.,  Vol.  I.,  No.  i,  pp.  103  ff. ; 
Fisher,  I.,  Appreciation  and  Interest,  Amer.  Econ.  Assoc.  Pub., 
Vol.  XL,  No.  4  ;  Taussig,  F.  W.,  The  Silver  Situation  in  the  United 
States,  Amer.  Econ.  Assoc.  Pub.,  Vol.  VII.,  No.  i,  pp.  91-118; 
Wells,  D.  A.,  Recent  Economic  Changes  ;  White,  H.,  The  Gold 
Standard,  The  World's  Congress  of  Bankers  and  Financiers, 
pp.  84-87. 

1.  Cause  of  the  Demand  for  Steadiness  of  the 
Price  Level.  — We  have  seen  that  the  demand  that 
price  level,  or  the  purchasing  power  of  money,  be 
kept  steady,  has  arisen  more  from  a  desire  to  keep 
the  value  of  debts  unchanged  than  from  a  wish  to 
distribute  the  current  product  of  industry  equitably. 
That  is,  emphasis  is  usually  laid  upon  money  as 
a  means  of  discharging  debts,  rather  than  as  a 
medium  of  exchange  or  of  distribution  of  product. 
This  emphasis  is  doubtless  due  to  the  fact  that 
sympathy  naturally  goes  out  to  people  who  suffer 
hardship  from  the  burden  of  their  debts,  whether 
that  burden  has  been  brought  on  by  their  own 


MONEY 

negligence,  by  misfortune,  or  by  social  changes 
over  which  they  have  no  control.  The  feeling 
probably  springs  from  the  old-time  notion  that 
people  are  debtors  because  they  are  poor ;  that 
debts  are  contracted  mainly  for  purposes  of  con- 
sumption. We  have  seen  that  this  is  to  a  large 
extent  a  mistaken  view.  It  is  much  more  impor- 
tant in  this  age  to  take  care  that  the  laborer  shall 
not  lose  by  any  change  in  the  purchasing  power 
of  money,  than  it  is  to  provide  against  the  appre- 
ciation of  debts.  Now  it  is  for  the  advantage  of 
the  laboring  class  to  have  money  which  appreciates 
with  respect  to  goods  and  depreciates  with  respect 
to  labor.  The  laborer  gains  if  a  dollar  will  pur- 
chase more  goods  and  less  labor  to-day  than  it 
would  yesterday.  If  money  appreciates  in  a 
proper  degree,  it  gives  the  laborer  his  due  share 
of  the  benefits  of  industrial  progress.  There  is 
some  reason  to  think  that  gold,  in  spite  of  the 
vicissitudes  of  its  value,  comes  pretty  near  doing 
this.1  In  any  case,  it  would  seem  that  the  pur- 
chasing power  of  gold,  in  the  long  run,  falls  with 
respect  to  labor,  and  rises  with  respect  to  goods. 

2.  Industrial  Improvements  diminish  the  Burden 
of  Debts  of  Producers.  —  There  are  some  considera- 
tions, however,  which  indicate  that  the  loss  to  debtors 
from  the  appreciation  of  debts,  caused  by  a  fall  in 
the  price  level,  is  less  than  at  first  view  appears. 
Debtors  lose,  indeed,  when  they  have  to  pay  in 
products  whose  prices  have  fallen  ;  but  this  loss 

1  See  J.  B.  Clark,  Pol.  Sd.  Qttar.,  September,  1895. 


FACTORS   MITIGATING   PRICE   CHANGES 

may  be  offset,  in  part  at  least,  by  a  reduction  in 
the  cost  of  production  of  the  goods  which  the 
debtor  produces.  Economic  progress  implies  in- 
creased labor  efficiency,  and  this,  at  first  at  any 
rate,  is  likely  to  benefit  the  producer  as  distinct 
from  the  laborer.  It  implies,  also,  improvements 
in  industrial  organization  and  in  machinery,  the 
advantages  of  both  of  which  are  bound  in  the  first 
place  to  accrue  to  the  producer.  He  cannot,  of 
course,  long  retain  this  advantage,  nor  is  it  likely 
to  be  in  its  amount  sufficient  to  offset  the  loss 
due  to  appreciation  of  money.  Nevertheless,  so 
far  as  it  goes,  it  certainly  does  act  as  a  buffer  be- 
tween the  debtor  producer  and  the  burden  of  his 
debts. 

Moreover,  the  debtor  shares  as  a  buyer  the  advan- 
tage of  lower  prices  of  goods  other  than  his  own, 
whether  he  buys  for  consumption  or  for  further 
production.  If  his  purchase  of  goods  is  for  further 
production,  the  advantage  is  equivalent  to  a  re- 
duction of  the  cost  of  his  own  articles,  and  the 
saving  is  of  the  kind  referred  to  in  the  preceding 
paragraph. 

3.  The  Debtor  Class  also  a  Creditor  Class.  —  In  the 
third  place,  it  must  not  be  forgotten  that  nowadays 
the  debtor  class  is  also,  to  a  considerable  extent, 
the  creditor  class,  and  that  their  debts  and  credits 
are,  in  large  degree,  simultaneous.  This  is  es- 
pecially true  of  business  debts,  which  form  the 
great  bulk  of  modern  indebtedness.  Business  to- 
day is  largely  carried  on  by  borrowed  capital,  and 
3'9 


MONEY 

business  which  is  not  so  carried  on  has  current 
debts  as  well  as  unpaid  accounts.  Hence,  any 
loss  which  business  men  surfer  as  debtors  is  offset 
partly,  or  wholly,  by  their  gains  as  creditors,  and 
vice  versa. 

4.  Debts  contracted  for  Profit.  —  Moreover,  debts 
are  contracted  now  more  for  the  purpose  of  secur- 
ing additional  profits  than  from  poverty.     Business 
men  contract  obligations  for  the  purpose  of  extend- 
ing   their   business   and  enlarging  their  incomes. 
Farmers  put  mortgages  on  their  farms  more  often 
in  order  to  buy  new  land,  or  to  make  improvements 
on  their  old  land,  than  because  the  owners  lack 
money  to  till  the  land  they  already  have.     In  other 
words,  most  debtors  to-day  are  debtors  for  profit, 
not  from  necessity ;  and  they  are  able  to  take  care 
of  themselves.     Hence,  to  a  not  inconsiderable  ex- 
tent, any  loss  which  they  incur  by  appreciation  of 
debts  would  mean  a  loss  of  expected  profit,  rather 
than  a  loss  of  principal. 

5.  Effect  of  shortening  the  Period  of  Debts.  —  Still 
further,  it  is  a  fact  that  a  great  volume  of  current 
indebtedness  is  contracted    for   short   periods,  so 
that  the  adjustment  of  the  purchasing  power  of 
money  to  offset  the  changes  in  the  burden  of  debts 
is  less  necessary.     This  statement,  again,  is  espe- 
cially true  of  business  debts.     Bank  loans,  which 
constitute  so  large  a  part  of  the  volume  of  debts, 
usually  run  for  a  few  days,  or  months  at  the  most. 
The  short-time  loans  of  the  banks  constitute  about 
sixty  per  cent,  of  the  whole,  and  only  a  small  por- 

320 


tion  of  bank  loans  run  over  six  or  nine  months. 
The  life  of  farm  mortgages  in  the  United  States, 
about  the  burden  of  which  so  much  was  written 
when  prices  were  still  tending  downward,  a  few 
years  ago,  did  not  average  more  than  four  or  five 
years.1 

A  gradual  fall  of  prices  running  through  a  series 
of  years  would  be  distributed,  therefore,  among 
several  groups  of  debtors,  so  that  it  is  incorrect  to 
assume,  as  so  many  times  has  been  done,  that  the 
burden  laid  by  falling  prices  upon  a  particular 
group  of  debtors  is  to  be  measured  by  the  change 
in  the  purchasing  power  of  money  during  the 
whole  period  of  the  fall.  The  loss  is  likely 
to  be  so  distributed  among  successive  debtors 
that  the  burden  on  each  is  trifling.  This  fact 
lessens  whatever  hardship  the  change  brings,  but 
does  not  altogether  remove  it.  A  hardship  is 
not  less  a  hardship  because  it  is  small  in  amount ; 
yet  where  the  loss  is  less,  the  suffering  is  also 
less. 

There  is,  however,  a  fixed  burden  of  indebted- 
ness which  is  long  standing  and  permanent  in  char- 
acter. This  is  true  of  most  public  debts,  and  their 
burden,  therefore,  cannot  be  lightened  by  the 
cause  just  described.  But  we  shall  see  that  this 
burden  is  somewhat  diminished  by  the  payment 
of  lower  rates  of  interest,  secured  by  means  of  fre- 
quent conversions. 

1  G.  K.  Holmes,  Bulletin  of  the  United  States  Department  of 
Labor,  November,  1895,  P-  4^- 

Y  321 


MONEY 

6.  The  Influence  of  the  Speculator  in  diminish- 
ing the  Effect  of  Price  Changes.  —  Whatever   bur- 
den is  placed   upon   debtors  by  falling  prices  is 
diminished,  moreover,  by  the  influence  of  specula- 
tion.    It  has  been  pointed  out  that  the  speculator 
in  a  measure  guarantees  stability  of  prices  by  dis- 
counting their  changes,  especially  for  short  periods. 
What,  in  the  absence  of  the  speculator,  would  be 
a  violent  price  change  is  likely  to  be  converted 
through  his  influence  into  a  number  of  successive 
small  fluctuations,  so  that  the  descent  from  a  high 
level  to  a  low  level  of  prices  is  by  a  series  of  short 
steps.     In  other  words,  the    speculator   discounts 
the  fall,  so  that  he  saves  the  entrepreneur  from  a 
loss  due  to  unexpected  changes  in  prices  through  a 
period  of  time  corresponding  to  the  cycles  of  busi- 
ness movements.     If  prices  are  falling  through  a 
long  period,  this  fall  need  not  embarrass  producers, 
since  all  they  care  for  is  to  be  guaranteed  against 
loss  during  the  comparatively  short  period  of  the 
producing  processes. 

7.  The  Influence  of  the  Rate  of  Interest  on  the 
Burden  of  Debts.  —  Still  again,  the  burden  of  in- 
debtedness is  lightened,  as  has  been  pointed  out, 
by  a  fall  in  the  rate  of  interest.     It  has  been  pretty 
conclusively  shown  by  Professor    Irving    Fisher,1 
that  the  rate  of  interest  tends  in  the  long  run  to 
accommodate    itself    more    or    less  closely  to   the 
changed  value  of  money,  and  therefore  to  offset, 

1  "  Appreciation  and  Interest,"  Amcr.  J:.con.  Assoc.  Pub,,  Vol.  XI, 
No.  4. 

322 


FACTORS   MITIGATING   PRICE   CHANGES 

in  part  at  least,  the  loss  caused  by  changes  in  the 
value  of  the  principal  of  the  debt.  It  is  evident 
enough  that  if  we  could  know  beforehand  that  the 
purchasing  power  of  money  was  to  fall  steadily  at 
a  definite  rate  through  a  known  series  of  years,  the 
changes  would  be  discounted  from  year  to  year, 
from  month  to  month,  or  from  day  to  day,  in  the 
prices  of  commodities,  and  in  the  rates  of  interest 
paid  on  loans.  The  changes,  however,  cannot  be 
thus  clearly  and  definitely  foreseen,  nor  are  they 
gradual  and  regular.  For  example,  to  mention 
only  one  cause  of  irregular  fluctuations,  the  new 
methods  of  mining  gold  and  the  discovery  of  new 
mines  would  alone  make  it  impossible  to  foretell 
exactly  what  the  changes  of  a  given  decade,  or 
a  given  year,  might  be.  Nevertheless,  even  the 
irregular  changes  are  more  or  less  made  up  for  in 
changing  rates  of  discount,  and  this  can  be  done 
more  and  more  exactly  the  shorter  the  debt  period 
and  the  more  frequent  the  conversions. 

What  creditors  wish  to  have  returned  to  them 
by  debtors  is  such  an  amount  of  real  capital  as 
will  yield  them  an  amount  of  enjoyment  equal  to 
what  they  would  have  obtained  by  the  consump- 
tion of  their  principal,  plus  a  sum  equal  to  their 
estimated  loss  by  deferring  that  consumption,  and 
their  share  of  the  advantage  of  economic  progress, 
during  the  period  of  the  loan.  What  lenders  and 
borrowers  are  primarily  interested  in,  then,  is  not 
the  rate  of  interest,  but  what  has  been  called  the 
ratio  of  accumulation,  or  the  amount  (principal 

323 


MONEY 

plus  interest),  of  the  loan.  What  the  lender  wants 
is  a  return  which  will  be  the  ratio  of  accumulation 
that  he  would  get  irrespective  of  any  change  in 
the  value  of  money.  The  loan  will  be  discharged 
by  a  sum  of  money  which  will  purchase  this 
amount  (principal  and  interest),  or  ratio  of  accu- 
mulation, of  the  goods  loaned.  If,  now,  the  value 
of  money  has  changed,  the  amount  to  be  returned 
in  terms  of  money  must  change  so  that  it  shall  be 
equivalent  to  the  amount,  or  ratio  of  accumulation, 
in  terms  of  goods,  —  or  better,  of  satisfaction,  assum- 
ing that  it  can  be  measured.  The  sum  necessary 
to  do  this  will  be  less  if  money  has  appreciated, 
and  more  if  it  has  depreciated.  But  of  the 
amount  of  the  debt  to  be  returned  in  money,  the 
principal  is  fixed ;  hence  the  whole  change  must 
fall  on  the  portion  of  the  amount  allotted  to  inter- 
est. That  is,  the  rate  of  interest  must  change, 
falling  as  money  appreciates  and  rising  as  it  de- 
preciates. Professor  Fisher  has  proven  that  high 
prices  and  rising  prices  are  directly  correlated  with 
high  rates  of  interest,  and  low  or  falling  prices 
with  low  rates,  and  that  an  adjustment  of  interest 
to  price  movements  takes  place  constantly,  but 
for  short  periods  is  not  so  exact  as  for  long  ones. 
He  has  constructed  the  following  table1  of  interest 
rates  to  show  that  experience  confirms  his  theory :  — 

1  "  Appreciation  and  Interest,"  Amer.  Econ.  Assoc.  Pub.,  Vol.  XI., 
No.  4,  p.  55. 


324 


FACTORS  MITIGATING  PRICE   CHANGES 


STATE  OF  PRICES 

ed 

H  Z 

•**H 

»  00 

S" 

f-  2 

e| 

ej 

°0  *Q 

2^ 

H  2 

*0     H 
M  00 

gu 

H  2 
t^  M 

00  0-, 

e| 

London,  High  prices 

3-8 

4-4 

3-6 

5-4 

5-1 

3-7 

3-o 

Low  prices 

3-2 

3-2 

2.6 

3-o 

2.6 

2-5 

2-5 

New  York,  High  prices 

9.1 

7-4 

7.0 

5-3 

Low  prices 

9.1 

6.7 

5-1 

5-i 

Berlin,  High  prices 

4.6 

3-7 

3-3 

Low  prices 

3-4 

3-2 

2-7 

Paris,  High  prices 

4.1 

2.6 

Low  prices 

2.4 

2.6 

Calcutta,  High  prices 

6.2 

5-4 

Low  prices 

5-6 

6.2 

Tokyo,  High  prices, 

12.3 

10.  I 

Low  prices 

12.0 

IO.  I 

Shanghai,  High  prices 

6.0 

Low  prices 

5-7 

"  Of  the  21  comparisons  contained  in  this  table, 
17  show  higher  rates  for  high-price  years  than  for 
low-price  years,  i  shows  the  opposite  condition, 
and  3  show  equal  rates  in  the  two  cases.  As 
the  table  covers  68  years  for  London,  40  for  New 
York,  30  for  Berlin,  20  for  Paris,  19  each  for  Cal- 
cutta and  Tokyo,  and  9  for  Shanghai,  or  205  years 
in  the  aggregate,  the  result  may  be  accepted  with 
great  confidence  that  high  and  low  prices  are 
usually  associated  with  high  and  low  interest, 
respectively."  1 

The  reasons  for  the  lack  of  exactness  in  adjust- 
ment are  to  be  found  in  the  unequal  ability  of 

1  "  Appreciation  and  Interest,"  Amer.  Econ.  Assoc.  Pub.,  Vol.  XL, 
No.  4,  p.  56. 

325 


MONEY 

Investors  to  discount  changes  in  the  price  level, 
and  in  the  fact  that  time  is  necessary  for  the  adjust- 
ment. The  imperfectness  of  adjustment  for  short 
periods  is  not  of  much  importance,  since  the 
change  in  the  value  of  money  through  short 
periods  is  likely  to  be  inconsiderable.  Of  course, 
a  change  in  the  rate  of  interest,  operating  in  be- 
half of  debtors,  does  not  decrease  the  burden  of 
debts  which  have  been  contracted  at  a  fixed  rate 
and  cannot  be  converted  at  a  lower  rate.  In  these 
cases  the  burden  must  be  borne,  but  the  long- 
period  debts  whose  conversion  is  not  practicable 
are  fortunately  a  small  proportion  of  the  whole, 
and  are  likely  to  become  less  as  loanable  capital 
increases.  Consequently,  speaking  generally,  the 
burden  imposed  on  debtors  by  falling  prices  is 
more  or  less  lightened  by  a  falling  rate  of  interest. 
"  We  thus  see  that  the  farmer  who  contracts  a 
mortgage  in  gold  is,  if  the  interest  is  properly  ad- 
justed, no  worse  and  no  better  off  than  if  his  con- 
tract were  in  a  'wheat'  standard  or  a  'multiple' 
standard."  :  Whatever  loss  he  incurs  arises  from 
the  slower  movement  of  the  interest  rate,  as  com- 
pared with  that  of  the  value  of  money. 

8.  Difficulty  of  doing  Justice  by  Artificial  Cor- 
rections of  Price  Changes.  —  Finally,  it  is  at  least 
questionable  whether  a  correction  of  any  given 
change  in  the  purchasing  power  of  money  would 
not  do  as  much  harm  as  good,  because  a  corrcc- 

1  "  Appreciation  and  Interest,"  Anier.  Ecoii.  Assoc,  Pub.,  Vol. 
XL,  No.  4,  p.  16. 

326 


FACTORS  MITIGATING  PRICE   CHANGES 

tion  that  was  made  for  debts  of  one  duration 
would  not  do  for  those  of  another.  If  we  could 
create  a  price  level  which  would  relieve  the  bur- 
den of  debts  running  for  three  years,  we  might  be 
adding  to  the  burden  of  those  which  run  for  some 
longer  period.  This  is  true,  altogether  apart  from 
the  social  loss  that  would  be  caused  by  abandon- 
ing the  principle  of  the  inviolability  of  contracts. 

Moreover,  we  must  distinguish  carefully  between 
hardship  and  injustice.  The  debtor  who  suffers 
hardship  on  account  of  a  fall  in  the  price  of  his 
goods  at  a  time  when  he  is  in  debt,  does  not  neces- 
sarily suffer  injustice  thereby.  In  contracting  his 
debt,  it  may  be  for  improvements  or  for  the  en- 
largement of  his  business,  he  takes  his  chances  of 
such  a  change  and  such  loss,  and  society  requires 
him  to  estimate  its  probability  fairly  and  to  dis- 
count it  correctly. 

9.  Gold  Monometallism  Probably  does  Substan- 
tial Justice  in  the  Long  Run. —  In  the  light  of  all 
the  considerations  going  to  show  that  the  effects  of 
gold  monometallism,  in  varying  prices  and  in  en- 
hancing the  pressure  of  debts,  are  far  less  evil 
than  is  often  claimed,  and  in  view  of  the  impossi- 
bility of  finding  a  standard  which  would  not  be 
open  to  even  greater  objections  than  is  the  gold 
standard,  especially  as  any  evil  results  of  the  latter 
to  debtors  arc  offset  by  the  other  influences  that 
we  have  discussed,  it  is  safe  to  conclude  that  the 
common  judgment  of  the  most  progressive  coun- 
tries in  favor  of  the  gold  standard  is  undoubtedly 
327 


MONEY 

wise.  Theory  leads,  on  the  whole,  to  the  same 
conclusion  as  experience  has  done ;  and  while,  in 
the  future  as  in  the  past,  there  will  be  times  when 
the  vicissitudes  of  life  will  give  rise  to  demands 
for  scaling  debts  and  for  relieving  some  people 
from  burdens  which  they  have  been  either  unfor- 
tunate enough,  or  foolish  enough,  to  put  them- 
selves under,  yet,  all  things  considered,  the 
maintenance  and  extension  of  gold  monometallism 
promises  more  of  good  and  less  of  harm  than  any 
other  system  thus  far  proposed.  The  system  is 
simpler,  the  monetary  utility  of  the  metal  is  high 
enough  to  meet  the  demand  of  economic  progress 
for  such  a  money,  and  the  fluctuations  in  its  value 
cause  no  greater  difficulties,  in  the  long  run,  than 
would  occur  in  prices  under  the  bimetallic  system. 
Moreover,  a  sufficient  supply  of  gold  is  certain 
enough.  A  relative  lessening  of  the  annual  prod- 
uct, under  some  conditions  of  mining,  does  not 
mean  that  the  supply  is,  or  is  likely  to  be,  ex- 
hausted ;  but  only  that  new  processes  are  needed 
for  the  extraction  of  the  metal.  Surely  the  expe- 
rience of  the  nineteenth  century  in  invention  and 
discovery  justifies  one  in  believing  that  the  diffi- 
culties caused  by  a  relative  scarcity  will  be  duly 
met  by  new  discoveries. 


328 


CHAPTER   XVI 

INCONVERTIBLE   PAPER   MONEY 

REFERENCES  :  Hepburn,  A.  B.,  Contest  for  Sound  Money,  Pt.  I., 
Chs.  4-1 1 ;  Jevons,  W.  S.,  Money  and  the  Mechanism  of  Exchange, 
Ch.  1 8  ;  Knies,  K.,  Das  Geld,  pp.  344  ff.;  Knox,  J.  J.,  United  States 
Notes,  Chs.  1-3,  13  ;  Laughlin,  J.  L.,  Principles  of  Money,  Chs. 
13-14;  Mill,  J.  S.,  Principles  of  Political  Economy,  Bk.  III.,  Ch. 
13;  Noyes,  A.  D.,  Thirty  Years  of  American  Finance,  Ch.  I; 
Pareto,  V.,  Cours  d'Economie  Politique,  Vol.  I.,  §  327  ff.;  Ricardo, 
D.,  Works  (McCulloch's  ed.),  Ch.  27;  Scott,  W.  A.,  Money  and 
Banking,  Ch.  6;  Sumner,  W.  G.,  History  of  American  Currency; 
Walker,  F.  A.,  Money,  Pt.  II.;  Money,  Trade,  and  Industry,  Chs. 
8—9  ;  \Vhite,  A.  D.,  Paper  Money  Inflation  in  France ;  White, 
H.,  Money  and  Banking,  2d  ed.,  Bk.  III.,  Chs.  1-6. 

1.  Kinds  of  Paper  Money.  —  The  idea  of  sup- 
planting metal  with  paper  money  for  use  in  mak- 
ing exchanges  is  not  modern.  It  is  true,  of  course, 
that  the  ancient  world  did  not  know  how  to  make 
paper,  but  they  used  articles  like  papyrus,  the 
bark  of  trees,  skin,  leather,  and  other  available 
substitutes.  Paper  money  was  used  in  China  as 
early  as  the  ninth  century,  and  probably  long  be- 
fore, and  there  is  reason  for  believing  that  its  use 
was  not  unknown  in  ancient  Assyria  and  Baby- 
lon. Paper  money  may  be,  as  we  have  already 
noted,  of  three  kinds:  representative;  convert- 
ible, redeemable,  or  fiduciary  ;  and  inconvertible, 
329 


MONEY 

or  irredeemable.  Representative  paper  money  is 
simply  certificates  of  deposit,  or  receipts,  certify- 
ing that  so  many  dollars,  or  pounds  sterling,  or 
marks,  have  been  deposited  with  the  issuer  of  the 
paper,  returnable  to  the  owner  on  presentation 
of  the  receipt.  They  are  more  convenient  to  use 
than  are  coins,  especially  for  large  sums,  and  are 
in  all  respects  the  exact  equals  of  the  specie  they 
represent.  They  are,  so  to  say,  representatives 
plenipotentiary  of  specie.  They  may  be  issued 
by  banks  or  by  governments. 

2.  Meaning  of  Convertibility.  —  By  convertible 
paper  we  mean  notes  issued  by  an  individual,  or 
by  a  public  or  private  corporation,  or  a  govern- 
ment, promising  to  pay  the  value  expressed  on  the 
paper  in  coin,  and  redeemable  in  coin  as  a  matter 
of  fact  on  presentation,  without  demur  or  delay. 
The  term  is  not  correctly  applied  to  paper  which 
is  payable  in  anything  else  than  legal  tender  coin. 
Notes  which  promise  to  pay  so  many  acres  of  land, 
or  so  many  bushels  of  wheat,  or  so  many  tons  of 
coal  or  iron,  would  not  be  convertible,  in  the 
proper  sense  of  the  word.  Convertible  paper 
must  at  all  times,  and  under  all  circumstances,  be 
instantly  mutable  into  the  money  which  is  the 
standard  legal  tender  of  the  country  in  which  the 
paper  is  issued.  Whether  or  not  the  notes  bear 
on  their  face  a  promise  to  pay  in  specie,  in  land, 
or  in  goods,  unless  they  are  as  a  matter  of  fact 
paid  in  specie  on  demand,  they  are  inconvertible 
paper.  It  is  important  to  emphasize  this  point,  — 

33° 


INCONVERTIBLE    PAPER    MONEY 

that  notes  to  be  convertible  must  be  payable  in 
legal  tender  specie,  —  because  the  advocates  of  fiat 
money  sometimes  urge  that  if  paper  is  payable  in 
goods  or  land,  it  has  the  attribute  of  convertibility. 
This,  however,  is  not  a  correct  statement.  Such 
notes  are  redeemable  in  the  goods  which  they  call 
for,  but  they  are  not  in  any  proper  sense  of  the 
word  convertible  paper.  The  word  "convertible" 
is  restricted  in  monetary  science  to  redeemability 
in  legal  tender  standard  money,  and  in  that  alone. 
This  is  the  case  because  what  business  men  need, 
if  they  use  paper  money  in  making  payments  at 
all,  is  a  kind  of  paper  immediately  exchangeable 
for  something  which  they  can  use  at  once  where 
paper  money  itself  will  not  pass.  The  only  kind 
of  money  available  for  this  purpose  is  standard 
metallic  money.  No  security  of  land  or  goods 
can  take  the  place  of  the  standard  metal  for  this 
purpose.  What  is  wanted  is  that  the  paper  shall 
be  exchangeable  for  a  given  amount  of  metal 
money  at  once  on  demand,  and  not  at  some  future 
time,  after  the  lapse  of  the  period  necessary  to 
sell  the  land  or  goods  which  are  held  as  security 
for  the  paper. 

3.  Characteristics  of  Irredeemable  Paper.  —  Ir- 
redeemable, or  inconvertible,  paper  money  consists 
of  notes  for  which  specie  is  not  obtainable  on 
demand.  This,  too,  may  be  issued  either  by  gov- 
ernments or  by  banks.  It  may  consist  of  notes 
which,  although  originally  convertible,  have  lost 
their  convertibility  through  the  insolvency  of  their 


MONEY 

issuers,  or  it  may  consist  of  paper  originally  issued 
without  the  expectation  or  intention  of  paying 
it  in  specie.  The  latter  form  is  properly  called 
fiat  money.  The  two  kinds  of  inconvertible 
paper  differ  in  their  mode  of  issue  only ;  in  their 
behavior  and  effects  they  are  in  all  respects  the 
same. 

A  government  may  issue  inconvertible  paper 
money  on  the  security  of  government  land,  or  on 
the  security  of  taxes  specially  assigned  to  redeem 
it.  On  the  other  hand,  such  paper  may  be  issued 
without  security,  and  put  into  circulation  by  politi- 
cal authority.  If  a  government  is  sufficiently 
autocratic  and  strong,  it  may  for  a  time  force  such 
paper  upon  a  people  unwilling  to  receive  it.  We 
recall  that  the  sole  condition  of  the  use  of  any 
article  as  money  is  that  it  shall  be  generally  ac- 
cepted in  the  discharge  of  obligations,  the  pay- 
ment of  purchases  and  of  debts.  Its  general 
acceptability  is  a  result  either  of  social  habit  or 
convention,  of  custom,  of  law,  or  of  the  credit  of 
the  issuer.  Gold  and  silver  pass  current  by  force 
of  social  habit,  due  to  their  capacity  for  directly 
satisfying  human  desire.  A  check,  or  a  bill  of 
exchange,  is  accepted  in  payment  because  the 
maker  of  the  paper  commands  the  confidence  of 
those  who  receive  it.  Inconvertible  paper  money 
issued  by  a  government  passes  from  hand  to  hand, 
if  it  passes  at  all,  either  because  the  people  have 
no  better  money,  and  the  quantity  of  it  is  so 
limited  that  its  evils  do  not  yet  appear,  or  because 

332 


INCONVERTIBLE    PAPER    MONEY 

the  government  is  strong  enough  to  compel  its 
citizens  to  accept  the  paper.  Since  it  answers 
their  purpose,  the  people  are  content  to  use  it. 

4.  Benefits  and  Dangers  of  Irredeemable  Paper. 
—  The  advantages,  as  well  as  the  dangers,  of  irre- 
deemable paper  money  have  been  many  times 
recited.  Paper  money  has  been  likened  by  Adam 
Smith  to  a  wagon  way  through  the  air,  the  use  of 
which  leaves  the  land  under  it  available  for  raising 
produce  to  satisfy  human  wants.  That  is  to  say, 
paper  money  makes  it  unnecessary  for  society  to 
invest  real  capital  for  the  sake  of  getting  a  medium 
of  exchange.  Gold  and  silver  are  expensive  to 
produce.  The  necessary  amount  of  them  requires 
the  labor  of  many  people  and  the  consumption  of 
much  wealth.  If  a  way  is  devised  which  makes  it 
unnecessary  to  use  gold  and  silver  in  exchange, 
clearly  the  labor  and  the  goods  formerly  used  in 
their  production  can  be  devoted  to  the  production 
of  goods  that  are  directly  consumable,  the  wealth 
of  the  community  would  be  increased,  and  the  gen- 
eral standard  of  consumption  would  be  raised.  If 
paper,  whether  convertible  or  inconvertible,  is  is- 
sued by  a  country  which  already  possesses  metallic 
money  sufficient  for  its  needs,  the  specie  will  partly 
or  wholly  cease  to  be  used.  Some  of  it  will  be  di- 
verted to  use  in  the  arts,  and  some  will  be  exported 
to  places  where  perhaps  it  can  be  of  more  service. 
A  displacement  of  metallic  money  in  use  by  paper 
money  is,  therefore,  beneficial  only  if  not  done  by 
all  countries  at  once.  If  all  countries  attempted  to 

333 


MONEY 

secure  this  benefit  at  the  same  time,  no  saving  of  real 
capital  would  result,  because  the  capital  necessary 
to  produce  the  existing  specie  has  been  invested 
already.  The  only  advantage  would  be  to  divert  a 
larger  amount  of  the  money  metal  to  the  arts.  A 
real  saving  would  be  made,  however,  by  the  uni- 
versal issue  of  paper,  in  so  far  as  it  rendered  un- 
necessary the  further  investment  of  capital  for 
additions  to  the  metallic  money  supply  to  meet  the 
needs  of  expanding  trade.  The  perception  of  this 
saving  of  real  capital  by  the  use  of  paper  money 
has  led  men  and  nations  often  to  pass  the  danger 
line  of  issue,  on  the  supposition  that  because  a  cer- 
tain quantity  of  paper  money  was  a  good  thing,  its 
use  for  all  purposes  of  exchange  and  payment 
would  also  be  good. 

A  second  advantage  to  society  in  the  use  of 
paper  money  lies  in  saving  the  wear  and  tear  to 
which  the  metals  are  subjected  when  used  as  a 
means  of  exchange.  The  loss  from  this  source  is 
considerable.  Moreover,  paper  money  is  more 
convenient  for  individuals  to  handle  ;  it  is  easy  to 
make  large  payments  with  it,  because  a  note  for 
$1000  is  as  easily  carried  and  transferred  as  a 
note  for  $i ;  and  finally,  paper  money  is  more  con- 
venient for  making  payments  in  distant  places. 
The  expense  of  sending  it  is  less,  as  is  also,  per- 
haps, the  risk  of  loss. 

The  fiscal  advantage  of  paper  money  should  not 
be  passed  by.  When  a  government  finds  its  credit 
so  low  that  it  cannot  borrow  money  to  meet  its 

334 


INCONVERTIBLE    PAPER    MONEY 

expenses,  unless,  perhaps,  at  exorbitant  rates  of 
interest,  it  sometimes  can  find  a  less  expensive  way 
to  secure  what  it  needs  by  issuing  notes.  It  can 
do  this  successfully  only  if  the  circulating  medium 
of  the  country  is  wholly,  or  largely,  composed  of 
specie  which  the  paper  can  replace. 

Paper  money  is,  of  course,  far  less  stable  in  value 
than  gold  money.  As  we  have  seen,  its  circulation 
depends,  in  the  last  analysis,  on  the  confidence  re- 
posed in  the  political  authority  which  issues  it, 
whereas  that  of  gold  is  based  on  social  habit  of 
universal  and  perennial  prevalence.  Consequently, 
the  area  of  acceptability  of  paper  money  is  re- 
stricted. Such  money  is,  generally  speaking, 
national  money,  without  value  beyond  the  boun- 
daries of  a  particular  country.  Its  smaller  area  of 
acceptability  makes  the  demand  for  it  variable,  and 
its  value  uncertain  and  changeable.  Additions  to 
the  supply  are  dependent  on  the  caprice,  or  the 
policy,  of  a  government,  while  additions  to  metallic 
money  are  obtained  only  at  a  cost ;  and  this  differ- 
ence causes  greater  variations  in  the  value  of  the 
paper. 

5.  Influence  of  the  Issue  of  Irredeemable  Paper 
on  Specie.  —  In  a  purely  metallic  monetary  system, 
when  a  country  is  using  metal  which  is  used  else- 
where as  money,  any  surplus  of  money  which  it 
may  have  is  at  once  revealed  by  the  higher  prices 
which  prevail  in  its  markets,  and  is  turned  into  the 
channels  of  trade  of  other  countries;  while  any  de- 
ficiency from  which  it  may  be  suffering,  under 

335 


MONEY 

similar  circumstances,  will  be  supplied  from  the 
circulation  of  foreign  countries.  Not  so  with  fiat 
paper.  Business  may  be  stagnant,  the  demand 
for  money  may  be  small,  and  prices  may  fall,  so 
that  less  money  really  would  be  needed,  and  yet 
the  flood  of  inconvertible  paper  may  rise  in  ever 
swelling  proportions.  When  a  country  with  me- 
tallic money  begins  to  issue  paper,  the  first  re- 
sult is  to  drive  the  specie  out  of  circulation.  The 
metallic  money  may  be  taken  by  the  government 
in  payment  of  taxes,  and  used  to  defray  those  pub- 
lic expenses  which  must  be  met  in  gold.  It  may 
be  reduced  to  bullion  for  use  in  the  arts,  because 
the  enlarged  supply  available  has  lowered  the 
price  and  increased  the  demand.  It  may  be 
hoarded  in  the  form  of  coin  by  people  who  are 
afraid  to  part  with  it,  or  who  look  for  the  return  of 
better  times  when  it  will  be  once  more  available  to 
make  payments.  Or,  finally,  it  may  be  exported 
to  discharge  foreign  indebtedness. 

If  the  amount  of  the  medium  of  exchange  de- 
manded by  the  business  of  the  country  does  not 
increase  as  fiat  money  comes  into  use,  the  metallic 
money  will  disappear  as  fast  as  the  paper  goes 
into  circulation.  If  the  need  for  the  medium  of 
exchange  increases  in  the  meantime,  the  specie 
may  not  disappear  so  rapidly,  and  the  total  volume 
of  the  means  of  exchange  in  the  country,  paper 
and  metallic,  will  increase.  During  this  process 
the  money  of  the  country  will  be  mixed  paper  and 
coin.  If,  however,  the  output  of  paper  money  be 
336 


INCONVERTIBLE    PAPER    MONEY 

persisted  in,  it  will  in  time  become  sufficient  to 
perform  by  itself  the  exchanges  of  the  country,  all 
the  coin  will  be  melted,  hoarded,  or  exported,  and 
the  currency  of  the  country  will  consist  wholly  of 
paper.  No  positive  harm  may  be  done  up  to  this 
point  of  the  process.  But  if  the  issue  of  the  paper 
becomes  still  larger,  its  mischievous  effects  will  be 
at  once  felt.  In  other  words,  the  positive  harm 
arises  from  over-issue,  or  the  output  of  a  quan- 
tity larger  than  the  specie  it  displaces.  The  paper, 
unlike  the  gold  and  silver,  cannot  be  exported,  nor 
diverted  to  use  in  the  arts.  The  merchants  of 
foreign  countries  cannot  use  it,  and  will  not  accept 
it  in  payment.  After  the  paper  has  driven  out 
the  coin,  further  issues  go  to  swell  the  volume  of 
home  currency  and  accumulate  like  water  in  a 
pond  that  has  no  outlet. 

6.  Signs  of  Excessive  Issue. — The  first  effect 
and  the  first  sign  of  an  issue  in  excess  of  the  whole 
volume  of  metallic  money  displaced,  or  of  the 
amount  of  exchange  medium  needed  by  the  coun- 
try, is  a  premium  on  gold.  Speaking  broadly,  the 
issue  of  the  paper  does  not  alter  the  exchange 
relation  of  gold  and  goods.  Payments  for  goods 
bought  abroad,  and  for  some  other  purposes,  must 
continue  to  be  made  in  gold.  But  if  the  gold  is  no 
longer  in  circulation,  it  must  be  bought  in  the  form 
of  bullion,  and  a  premium  will  be  paid  for  it  in 
terms  of  the  new  paper  money.  This  premium 
will  show  itself  in  a  rise  in  the  rate  of  foreign  ex- 
change. Foreign  business  indebtedness  is  ordi- 
z  337 


MONEY 

narily  discharged  by  means  of  bills  of  exchange, 
but  bills  of  exchange  are  quoted  in  terms  of  gold. 
If,  on  a  specie  basis,  a  bill  of  exchange  for  ,£1000, 
drawn  in  London  on  New  York,  can  be  paid  by 
$4870,  it  would  require  $4969  to  pay  it  if  the  cur- 
rency of  the  United  States  were  paper  which  had 
depreciated  two  per  cent.  That  is,  the  American 
importer  will  have  to  pay  $4969  in  paper  money, 
in  order  to  buy  a  bill  payable  in  gold  to  the  amount 
of  ^1000.  Now,  such  a  condition  is  extremely 
bad  for  the  foreign  trade  of  the  country  in  which 
gold  is  at  a  premium.  It  must  make  its  foreign 
payments  with  one  kind  of  money,  and  dis- 
charge its  domestic  obligations  with  another.  The 
greater  its  balance  of  foreign  indebtedness,  the 
more  heavily  does  the  burden  of  the  premium  on 
gold  diminish  the  profits  of  its  exports  and  render 
its  trade  unremunerative.  On  so  small  a  margin 
is  trade  carried  on,  that,  in  some  cases,  the  pre- 
mium on  gold  would  turn  an  expected  profit  into 
a  loss.  Consequently,  a  small  premium,  or,  indeed, 
the  mere  likelihood  of  a  premium  on  gold,  makes 
the  foreign  creditor  demand  a  more  favorable  ex- 
change in  order  to  offset  the  premium,  or  discount 
the  risk  of  loss  involved  in  its  possible  appearance. 
The  domestic  importer,  being  subjected  to  a  loss, 
will  try  to  recoup  himself  by  raising  the  prices  of 
his  goods  in  the  home  currency.  This  step  in  the 
process  brings  us  to  a  consideration  of  the  second 
evil  of  inconvertible  paper  money. 

When  the  specie  has  been  driven  out  of  circula- 
338 


INCONVERTIBLE    PAPER    MONEY 

tion,  prices  are  no  longer  quoted  in  gold,  but  in 
paper.  That  is,  they  rise  as  the  value  of  the  paper 
falls.  Thus  the  paper  becomes  a  kind  of  sec- 
ondary monetary  standard.  If  the  excess  of 
paper  over  the  specie  displaced  is  small,  it  is  pos- 
sible that  no  change  in  the  prices  of  goods  will  be 
noticed.  For  the  force  of  custom  on  prices,  in 
some  places  and  for  some  articles  at  least,  is  very 
strong.  It  is  a  sort  of  economic  friction,  which  in- 
terferes with  the  freedom  of  the  price  movement. 
An  excess  of  paper  great  enough  to  show  itself 
in  a  slight  rise  of  the  foreign  exchanges  may  not 
manifest  itself,  therefore,  in  general  prices.  But 
the  appearance  of  the  premium  on  gold  as  shown 
in  the  exchanges  is  proof  that  inflation  of  prices 
and  depreciation  of  the  paper,  in  goods  as  well  as 
in  gold,  is  close  at  hand,  and  that  ere  long  the 
price  level  in  the  country  of  issue  will  be  different 
from  that  of  the  rest  of  the  world ;  or,  more  ac- 
curately, will  not  bear  the  same  relation  to  the 
world  price  level  as  existed  under  the  specie 
regime. 

7.  The  Relation  of  the  Quantity  of  Inconvert- 
ible Paper  to  its  Value. — It  is  important,  to  dis- 
cover how  far  prices  respond  to  an  increase  in  the 
paper-money  issues  after  these  exceed  in  amount 
the  specie  they  displace.  We  have  seen  in  another 
connection 1  that  it  is  with  inconvertible  paper 
money  that  the  so-called  quantity  theory  of  prices, 
within  certain  limits,  holds  true.  Paper  money 

1  See  pp.  139-141. 
339 


MONEY 

derives  its  value  solely  from  the  demand  for  it  foi 
exchange  purposes.  Its  marginal  utility  is  always 
merely  the  reflected  marginal  utility  of  the  goods 
it  exchanges  for.  If  the  marginal  composite  unit 
of  goods  exchanges  for  a  certain  amount  of  paper, 
thus  fixing  the  price  level,  that  marginal  unit  will 
call  for  double  the  quantity  of  paper  money  if  the 
whole  volume  of  paper  be  doubled ;  provided,  in 
the  meantime,  the  total  quantity  of  commodities 
has  not  changed,  and  credit  transactions  and  the 
efficiency,  or  rapidity  of  circulation,  of  the  paper 
money  are  constant.  That  is,  under  the  fixed  con- 
ditions assumed,  the  value  of  the  paper  money 
varies  inversely  as  its  quantity.  Such  is  the  ac- 
cepted theory.  Of  course  these  fixed  conditions 
are  never  realized,  and  the  quantitative  relation 
cannot  be  proved  or  disproved,  statistically.  But 
the  statement  that  the  value  of  the  paper  depends 
on  its  quantity,  is  not  altogether  correct,  under  any 
conditions.  It  depends  partly  upon  the  confidence 
of  the  community  in  the  power  of  the  paper  to 
continue  to  circulate,  and  this  confidence  becomes 
less  as  the  volume  of  the  paper  enlarges.  If  the 
depreciation  is  slow  and  approximately  regular, 
prices  and  other  conditions  will  accommodate 
themselves  to  the  increasing  quantity.  But  if  the 
depreciation  be  very  rapid,  people  lose  confidence 
in  their  ability  to  pass  the  paper  without  consider- 
able loss,  many  of  them  will  refuse  to  accept  it, 
and  its  value  will  fall  more  rapidly  than  in  the  pro- 
portion of  the  increased  output.  To  pay  $1000 
340 


INCONVERTIBLE    PAPER    MONEY 

for  a  breakfast,  as  Secretary  Chase  thought 
might  be  possible  from  the  issue  of  United  States 
notes  in  the  early  days  of  the  Civil  War,  would  so 
demoralize  men's  confidence  in  the  stability  of  the 
money  as  to  cause  a  fall  in  its  value  altogether 
disproportionate  to  its  increase  of  quantity.  More- 
over, as  confidence  that  others  will  take  the  money 
grows  less,  on  account  of  the  increasing  quantity, 
the  danger  of  loss  from  this  fact  is  discounted  by 
the  present  sellers  of  goods,  and  the  purchasing 
power  of  money  is  still  further  decreased.  The 
marginal  utility  of  the  instrument  of  utility  for  use 
falls  more  rapidly  the  nearer  we  approach  surfeit, 
just  as  the  marginal  utility  of  consumable  goods 
does  under  like  circumstances.  The  relation  be- 
tween the  value  and  the  quantity  of  paper  money 
could  be  true,  then,  only  under  impossible  condi- 
tions, and  only  if  its  quantity  were  either  fixed  or 
increasing  very  slowly. 

8.  The  Effect  of  an  Issue  of  Paper  Money  on  the 
Price  Level.  —  An  output  of  paper  money  in  one 
country  at  first  gives  an  upward  impulse  to  the 
world's  level  of  prices.  The  truth  of  this  state- 
ment does  not  depend  upon  the  truth  or  falsity 
of  the  quantity  theory  of  the  value  of  money,  at 
any  rate,  as  usually  stated.  All  that  the  statement 
assumes  is  that  some  relation  exists  between  the 
supply  of  money  and  its  value,  just  as  in  the  case 
of  other  commodities.  A  change  in  the  supply, 
unless  so  small  as  to  be  entirely  checked  by 
economic  friction,  must  always  have  some  effect, 


MONEY 

although  it  may  not  appear  in  a  modification  of 
prices,  but  be  entirely  lost  to  view  by  concomitant 
changes  in  credit  exchanges,  in  barter  exchanges,  in 
the  efficiency  of  money,  or  in  the  volume  of  goods 
put  upon  the  market. 

Let  us  suppose  that  the  metallic  money  of  the 
United  States  were  arbitrarily  and  instantaneously 
withdrawn  from  use,  and  an  equal  amount  of 
paper  money  substituted.  No  reason  appears  why 
such  a  change  should  occasion  any  alteration  in 
the  price  level  of  the  world's  goods.  Let  us  sup- 
pose, further,  that  this  change  having  been  made, 
the  gold  which  was  withdrawn  is  arbitrarily  and 
suddenly  put  into  circulation  in  those  countries 
which  retain  their  metallic  money.  So  far  as  con- 
cerns this  change  alone  the  level  of  the  world's 
prices  will  tend  to  rise,  and  the  prices  in  the 
United  States,  under  its  regime  of  paper  money, 
will  share  in  the  upward  swell.  If,  instead  of  the 
arbitrary  withdrawal  of  specie,  we  have  a  gradual 
exportation  of  it,  as  paper  money  is  put  out  in 
increasing  volume,  until  all  the  gold  has  been 
driven  out,  the  character  of  the  result  is  not 
changed  although  the  degree  may  differ  much. 
As  a  matter  of  fact,  gold,  when  supplanted  with 
paper,  disappears  in  several  ways.  The  release  of 
the  metal  from  the  service  of  demand  for  a  means 
of  payment  lowers  its  value,  and  some  of  it  is 
consequently  attracted  to  use  in  the  arts.  Some, 
too,  may  be  hoarded,  and  some  will  undoubtedly 
be  exported  to  specie-using  countries.  Whatever 
342 


INCONVERTIBLE    PAPER    MONEY 

the  division  of  the  amount  between  the  uses,  the 
value  of  the  metal  is  lowered  in  consequence  of 
the  cessation  of  its  use  in  one  country.  In  some 
measure,  therefore,  does  the  level  of  prices 
throughout  the  world  tend  to  rise.  If,  in  accord- 
ance with  our  first  supposition,  the  specie  pushed 
out  went  out  of  use  altogether,  the  amount  of 
paper  money  which  would  be  needed  to  replace  it 
in  order  that  prices  should  not  be  affected  by  the 
change,  considered  by  itself,1  would  be  exactly 
the  amount  of  specie  displaced.  But  as  paper 
comes  in  specie  does  not  go  out  of  use,  but  sim- 
ply changes  its  location,  raising  the  price  level  as 
it  goes.  Hence  the  amount  of  paper  which  a 
country  can  issue,  without  causing  its  price  level 
to  vary  from  that  of  the  world  at  large,  must  be 
greater  than  the  amount  of  specie  displaced,  by  a 
degree  dependent  on  a  change  in  the  world's 
price  level.  The  amount  of  paper  which  will 
exactly  displace  the  specie,  as  the  latter  goes  into 
use  elsewhere,  is  greater  than  the  amount  which 
would  replace  it  if  it  were  suddenly  destroyed. 
In  the  latter  case,  the  price  level  which  prevailed 
under  the  use  of  specie  would  remain ;  in  the 
former  case,  a  higher  one  would  take  its  place ;  in 
both  cases,  the  price  level  in  the  paper-using 
country  would  be  the  world  level.  Therefore,  an 
amount  of  paper  equal  to  the  specie  displaced 
would  be  excessive,  on  the  old  price  level. 

It  follows  from  what   has   been    said    that   the 

1  Irrespective  of  any  impairment  of  public  confidence. 
343 


MONEY 

fluctuations  of  prices,  to  which  a  country  using 
inconvertible  paper  money  is  subjected,  have 
three  sources.  First,  the  prices  of  its  goods  are 
subject  to  the  same  fluctuations  as  are  those  of 
gold-using  countries,  due  to  the  progress  and 
vicissitudes  of  trade  and  industry.  No  country 
can  escape  these  unless  the  excessive  use  of  incon- 
vertible paper  diminishes  its  business.  Such  a 
country  must  suffer,  in  the  second  place,  from  the 
fluctuations  in  prices  caused  by  the  varying  value 
of  its  paper  money  in  terms  of  gold ;  and,  in  the 
third  place,  from  variations  due  to  speculative 
attempts  on  the  part  of  business  men  to  protect 
themselves  by  discounting  future  changes  in  the 
value  of  the  paper. 

9.  The  Premium  on  Gold  and  the  Depreciation  of 
Paper  in  Commodities. — The  amount  of  inflation 
of  prices  of  goods,  in  terms  of  paper  money,  is  the 
measure  of  the  depreciation  of  the  paper.  Since  a 
given  quantity  of  goods  is  exchangeable  for  a 
certain  amount  of  gold  as  well  as  of  paper,  it 
would  seem,  at  first  thought,  that  the  depreciation 
of  the  paper  money  in  terms  of  goods  would 
exactly  equal  the  premium  on  gold.  In  other 
words,  it  would  seem  that  the  paper  price  of 
bullion  would  be  greater  than  the  mint  price,  by 
an  amount  equal  to  that  by  which  the  foreign 
exchange  is  below  the  real  exchange. 

It  has  long  been  a  matter  of  remark,  however, 
that  the  premium  on  gold  does  not  exactly  measure 
the  amount  of  depreciation  of  the  paper,  or  the 
344 


INCONVERTIBLE    PAPER    MONEY 

inflation  of  prices.  The  purchasing  power  of 
inconvertible  paper  money  is  a  little  less,  when 
measured  in  goods  than  it  is  when  measured 
in  gold.  There  are  several  possible  reasons  for 
this  difference.  In  the  first  place,  the  differ- 
ence between  the  depreciation  of  paper  in  gold 
and  the  inflation  of  prices  is  probably  enhanced 
by  the  probable  risk  of  an  increase  in  the  quantity, 
and  of  future  changes  in  the  purchasing  power  of 
the  paper.  It  might  seem  that  the  discount  of  this 
risk  would  affect  gold  and  other  goods  in  equal 
degrees.  But  the  prices  of  other  commodities  can- 
not be  changed  as  quickly  as  can  the  price  of  gold. 
Hence  they  cannot  adapt  themselves  so  quickly  as 
can  gold  to  changes  in  the  supply  of  paper.  The 
period  for  which  the  risk  of  change  must  be  dis- 
counted is,  therefore,  longer  for  other  commodities 
than  for  gold,  and  the  amount  of  discount  larger. 
Consequently  the  total  depreciation  of  paper  money 
in  goods  is  greater  than  in  gold. 

A  second  cause  of  the  difference  in  the  amount 
of  depreciation  of  paper  in  terms  of  gold  and  other 
goods,  respectively,  is  found  in  the  lower  value  of 
gold  caused  by  its  ejection  from  the  country  which 
adopts  paper.  As  we  have  seen,  the  export  of  the 
gold  raises  the  world  level  of  prices ;  that  is,  it 
lowers  the  value  of  gold.  Since  prices  are  ex- 
pressed in  paper  money,  in  the  country  which  has 
adopted  it,  an  increase  of  paper  lowers  its  own 
value  in  gold  and  goods,  or  raises  their  value  in 
terms  of  itself ;  but  gold  has  fallen  from  its  pre- 
345 


MONEY 

vious  value,  and  this  fall  in  a  measure  offsets  the 
rise  due  to  the  increase  of  the  paper.  As  nothing 
of  the  kind  happens  to  commodities,  their  prices 
show  the  full  rise  due  to  the  increase  of  paper. 
Thus  gold  suffers  a  double  fall  in  price  as  against 
one  fall  suffered  by  other  commodities.  If,  on  the 
other  hand,  paper  money  contracts,  its  value  rises 
as  compared  with  goods  and  gold. 

Another  cause  of  the  difference  in  depreciation 
as  measured  by  gold  and  by  goods,  respectively,  is 
found  in  the  fact  that  the  inconvertible  legal-ten- 
der paper  serves  as  a  basis  of  credit.  Besides  the 
increased  money  demand  for  goods,  caused  by  the 
additional  issues  of  paper,  there  is  also  a  credit 
demand  due  to  the  credit  based  on  these  extra 
issues.  Hence  the  demand  for  goods  is  increased 
by  more  than  the  amount  of  the  paper,  and  prices 
rise  in  a  greater  degree  than  the  extra  paper  of 
itself  would  warrant.  But  no  such  twofold  demand 
acts  on  gold.  Hence  an  extra  issue  of  paper  does 
not  cause  the  value  of  gold  to  rise  so  much  as  that 
of  other  goods,  and  therefore  the  paper  depreciates 
more  in  terms  of  the  latter  than  in  the  former. 
Suppose  now  that  the  excess  of  notes  is  withdrawn. 
The  credit  demand  based  on  these  must  also  be 
withdrawn.  Prices  of  goods  will  fall  under  the 
twofold  influence.  Gold  will  fall  under  the  influence 
of  the  retirement  of  the  notes  only. 

The  degree  of  depreciation  of  an  inconvertible 
paper  currency  is  affected  by  several  circumstances, 
aside  from  its  quantity.  If  it  be  issued  in  increas- 

346 


INCONVERTIBLE    PAPER    MONEY 

ing  quantities  at  a  time  when  the  demand  for  a 
medium  of  exchange  is  growing  fast  enough  to 
absorb  it,  it  will  not  depreciate.  If  the  demand 
for  currency  happens  to  be  decreasing,  the  depre- 
ciation will  be  increasing.  If,  again,  the  issue  be 
made  when  for  some  reason  gold  is  being  hoarded, 
as  in  a  time  of  war,  or  of  a  great  commercial  panic, 
depreciation  might  not  ensue.  There  is  never  any 
certainty,  however,  that  the  issue  of  paper  money 
will  be  timely,  and  no  confidence  can  be  felt 
beforehand  that  the  evil  effects  of  excessive 
issues  would  be  counteracted  by  the  influences 
mentioned. 

10.  Special  Provision  for  maintaining  the  Value 
of  Irredeemable  Paper.  —  It  sometimes  happens  that 
an  attempt  is  made  to  give  artificial  value  to  fiat 
money  by  making  it  receivable  for  taxes.  The 
effect  of  such  a  measure  is  temporary  and,  unless 
the  quantity  is  carefully  regulated,  very  small.  If 
the  amount  of  paper  money  issued  is  larger  than  the 
amount  of  metal  displaced,  by  a  quantity  just  equal 
to  current  government  income,  the  excess  over 
and  above  the  demand  needed  for  effecting  ex- 
changes is  the  amount  which  the  government  with- 
draws from  circulation.  The  effect  of  receiving 
this  excess  in  payment  of  government  dues  is  pre- 
cisely the  same  as  the  current  redemption  of  the 
excess,  provided  it  is  held  in  the  treasury  after 
it  is  received.  This  could  occur  only  if  it  were 
surplus  revenue.  If,  however,  the  excess,  over 
and  above  the  amount  equal  to  the  metal  displaced, 
347 


MONEY 

is  greater  than  the  current  government  revenue 
calls  for  from  day  to  day,  then  this  channel  of 
overflow  for  surplus  paper  money  is  choked,  and 
the  effect  is  the  same  as  if  the  current  redemption 
were  not  large  enough  to  take  care  of  the  excess. 
Beyond  this  point  the  course  of  the  purchasing 
power  of  the  paper  money  will  be  unaffected  by 
the  fact  that  it  is  receivable  for  government 
dues. 

It  is  further  urged  at  times  that  if  the  people 
have  confidence  that  the  money  will  ultimately  be 
redeemed  by  the  government  that  issues  it,  its 
value  will  be  sustained.  This  belief  is  utterly 
without  foundation,  except  so  far  as  the  belief 
in  ultimate  convertibility  leads  to  hoarding.  The 
value  of  a  promise  to  pay  may  be  sustained  under 
such  circumstances  if  the  paper  is  held  as  an 
investment,  but  its  value  as  a  medium  of  exchange 
will  not  be  affected  at  all.  The  purchasing  power, 
which  is  an  essential  characteristic  of  a  medium  of 
exchange,  is  present,  not  future,  purchasing  power. 
It  is  what  a  piece  of  money  will  buy  now  that  de- 
termines what  it  will  pass  for.  If  the  paper  were 
at  a  discount,  and  the  certainty  of  redemption  were 
established  at  a  period  not  too  remote,  a  portion  of 
the  paper  would  probably  be  withdrawn  from  cir- 
culation as  money,  and  held  as  an  investment,  and 
the  purchasing  power  of  the  remainder  would 
thereby  be  raised.  Aside  from  this  probability  the 
certainty  of  ultimate  redemption  would  have  no 
effect. 

348 


INCONVERTIBLE    PAPER    MONEY 

11.  The  Evils  of  Irredeemable  Paper.  —  The  evils 
of  depreciating  and  fluctuating  paper  money  can- 
not easily  be  over-emphasized.  Inflated  prices 
introduce  an  element  of  uncertainty  into  busi- 
ness. Business  men  cannot  be  sure  that  the 
prices  at  which  they  contract  to  sell  or  buy  will 
remain  the  same  from  the  time  the  contract  is 
made  until  the  transaction  is  closed.  Speculation 
of  the  worst  kind  becomes  a  feature  of  business 
life.  Business  sagacity  is  thwarted,  and  the  spirit 
of  prudence  gives  place  to  that  of  gambling.  Risks 
of  change,  the  probability  of  inflation  or  contrac- 
tion, must  be  discounted,  with  a  wide  margin.  The 
result  is  to  produce  greater  changes  in  prices  than 
the  mere  difference  in  the  amount  of  money  would 
of  itself  cause.  Moreover,  the  speculative  fever 
thus  engendered  introduces  a  demoralizing  influ- 
ence into  a  community ;  a  desire  to  get  rich 
quickly  is  stimulated,  to  the  detriment  of  that 
security  and  steadiness  which  are  essential  to 
sound  business  methods  and  morals.  Expensive 
living  becomes  the  fashion.  The  nominal  price 
of  all  property  rates  so  much  higher  than  it  for- 
merly did  that  people  regard  themselves  as  grown 
suddenly  rich,  forgetting  that  the  change  is  a 
nominal,  and  not  a  real  one.  When  a  contrac- 
tion of  the  paper  money  flood  takes  place,  these 
changes  are  reversed ;  but  as  it  is  so  much  harder 
to  retrench  the  expenses  of  living,  and  to  think  of 
one's  self  as  becoming  poor  by  the  fall  in  nominal 
values,  the  feeling  of  sacrifice  and  loss  engendered 

349 


MONEY 

depresses  a  community,  and  for  a  time  deadens 
enterprise.  Moreover,  the  fluctuations  of  the  value 
of  inconvertible  paper  defraud  creditors  or  debtors, 
according  to  the  direction  of  the  movement,  with- 
out any  corresponding  advantage  or  offset,  and 
they  bear  down  severely  on  wage-earners.  Wages 
are  paid  in  paper,  and,  since  wages  do  not  rise  as 
early  or  as  rapidly  as  prices  do,  the  cost  of  living 
is  increased  to  all  wage-earners. 

12.  The  Fiscal  Advantage  of  Irredeemable  Paper. 
—  The  fiscal  advantage  which  the  government  has 
in  securing  a  loan  without  interest,  by  the  issue  of 
such  paper,  is  dearly  bought  by  the  community. 
It  is,  in  effect,  an  unjust  method  of  taxation;  for 
it  strikes  hardest  the  poor  and  ignorant,  and  it 
makes  the  burden  of  taxation  variable  and  uncer- 
tain. When  a  government  once  yields  to  the 
temptation  to  issue  inconvertible  paper,  it  has 
entered  upon  a  path  that  is  likely  to  lead  it 
downward  in  the  scale  of  political  integrity  and 
national  honor.  The  amount  of  paper  money 
which  a  government  is  likely  to  issue  depends 
primarily  on  its  need  for  revenue. 

It  is  a  fiscal  need,  rather  than  a  business 
need,  that  determines  what  the  quantity  of  this 
kind  of  money  shall  be.  Yet  money  is,  first  and 
foremost,  a  tool  of  the  business  world.  Its  quan- 
tity must  depend  on  the  demand  for  a  means  of 
exchange,  its  value  must  not  be  caused  to  vary  any 
more  than  the  accidents  of  business  bring  about, 
and,  above  all  things,  should  be  free  from  the  vari- 

35° 


INCONVERTIBLE    PAPER    MONEY 

ations  due  to  forces  outside  of  business  and  alto- 
gether unconnected  with  the  service  which  money 
is  intended  to  render.  When  once  paper  money 
has  been  issued  in  excess  of  the  needs  of  a  com- 
munity, and  the  price  level  has  begun  to  rise  in 
consequence,  demoralization  is  inevitable.  Fiat  pa- 
per has  been  well  called  the  alcohol  of  commerce, 
whose  fumes,  entering  the  brains  of  individuals 
and  of  government  officers,  seem  to  make  them 
incapable  of  sober  judgment  or  self-restraint  in  the 
matter  of  further  issue  and  further  demoralization. 

13.  Motives  to  the  Issue  of  Irredeemable  Paper.  — 
While  the  fiscal  necessity  of  a  government  is  gen- 
erally the  primary  cause  of  issuing  fiat  money,  the 
ease  with  which  the  money  is  obtained  and  the 
apparent  temporary  profit  which  it  brings  to 
the  government  easily  create  a  popular  demand 
for  its  continued  and  larger  use.  It  is  not  evident 
to  the  people  at  large  that  the  temporary  benefits 
of  paper  issues  have  a  very  definite  limit,  and  that 
the  use  of  fiat  paper  beyond  this  limit  will  cause 
only  harm  and  loss. 

Besides  the  fiscal  motive  for  the  use  of  fiat 
money,  pressure  for  its  increase  comes  from  the 
debtor  class.  When  the  paper  has  driven  up 
prices,  debtors  find  it  easier  to  pay  debts  which 
were  contracted  when  prices  were  low.  Of  course, 
payment  in  depreciated  paper  is  not  an  equitable 
return  ;  but  as  long  as  human  nature  is  as  it  is,  there 
will  always  be  some  who  are  ready  to  take  advan- 
tage of  any  means  for  escaping  their  just  burdens. 

35 1 


MONEY 

Still  another  reason  which  makes  it  difficult  for 
a  country  to  stop  short  of  disaster  when  once  it 
has  entered  upon  a  career  of  depreciated  paper,  is 
found  in  the  proper  and  honest  desire  of  many 
people  to  secure  for  the  people  at  large  whatever 
saving  is  effected  by  the  use  of  paper  money.  In 
the  view  of  these  people,  money  is  a  tool  of  society, 
and  the  community  as  a  whole  should  obtain  what- 
ever advantage  comes  from  the  improvement  of  it. 
The  purpose  of  this  demand  is  entirely  proper,  but 
the  use  of  fiat  paper  money  to  effect  this  saving  is 
very  questionable,  in  view  of  the  dangers  which  it 
invites.  There  are  ways  of  securing  to  the  public 
whatever  benefit  there  is  in  the  use  of  paper  money 
without  inviting  the  dangers  of  depreciation. 

14.  Some  Noted  Historical  Examples  of  Irredeem- 
able Paper. — The  most  noted  instances  of  incon- 
vertible paper  money  are  the  French  assignats  and 
mandats,  the  notes  of  the  Bank  of  England  dur- 
ing the  so-called  period  of  restriction  following  the 
Napoleonic  wars,  the  notes  issued  by  the  Conti- 
nental Congress,  and  the  greenbacks  issued  by 
our  government  during  the  Civil  War. 

The  assignats  were  issued  by  the  revolutionary 
government  of  France  in  1789.  These  were  legal 
tender  notes  secured  by  the  lands  confiscated  from 
the  clergy.  That  is,  these  lands  were  pledged  for 
the  ultimate  redemption  of  the  notes.  To  facilitate 
their  circulation,  moreover,  bank-note  issues  were 
prohibited  ;  but  they  fell  rapidly  in  value  because 
of  excessive  issue,  and  in  1796  a  one-hundred-franc 
352 


INCONVERTIBLE    PAPER    MONEY 

note  was  worth  one-third  of  a  franc  in  gold.  They 
were  replaced  later  with  the  so-called  mandats. 
These  differed  from  the  assignats  only  in  the 
respect  that  for  their  payment  specified  portions 
of  land  were  assigned. 

The  first  issue  of  paper  money  by  our  Conti- 
nental Congress  was  in  1775,  to  the  amount  of 
$10,000,000.  These  were  not  made  legal  tender 
by  the  Congress,  although  they  were  made  so 
later  by  the  various  colonies.  Before  the  time  of 
the  Declaration  of  Independence  $15,000,000  had 
been  issued.  Within  four  years  the  volume  of  in- 
convertible paper  rose  to  more  than  $240,000,000, 
and  its  value  fell  so  rapidly  that  by  1781  it  was 
worthless.  This  fall  took  place  in  spite  of  many 
efforts  of  the  public  and  the  legislature  to  pre- 
vent it. 

The  United  States  greenbacks,  or  legal-tender 
notes,  were  first  authorized  by  Congress  in  1862,  to 
the  amount  of  $150,000,000.  Within  four  months 
$150,000,000  more  were  authorized.  The  maxi- 
mum sum  issued  during  the  war  was  $450,000,000. 
They  fell  to  35  cents  per  $i  in  1864,  and  fluctu- 
ated at  various  rates  until  the  resumption  of  specie 
payment  in  1879.  The  amount  outstanding  is 
$346,681,016. 

15.  Regulation  of  Irredeemable  Paper.  —  Waiv- 
ing the  question,  which  many  people  answer  in  the 
negative,  whether  it  is  ever  really  necessary  for 
the  government  of  a  wealthy  country  to  resort  to 
fiat  paper,  it  is  important  to  determine  some  means 
2A  353 


MONEY 

of  regulating  the  amount  of  issues  so  as  to  avoid 
the  evils  of  depreciation  and  inflation.  We  have 
seen  that  some  people  think  it  possible  to  measure 
the  fluctuations  in  prices  and  to  enlarge  or  contract 
the  amount  of  paper  money  accordingly.  Aside 
from  the  unsound  theory  which  underlies  this  pro- 
posal, the  measurement  proposed  is  practically 
impossible. 

A  premium  on  gold,  however,  is  a  sure  sign  of 
excess  of  issue  of  paper.  Therefore,  the  quantity 
of  paper  should  be  so  regulated  as  to  prevent  the 
appearance  of  this  premium.  The  most  successful 
instance  of  the  management  of  paper  issues  in  this 
way  is  that  of  the  Bank  of  France  during  and 
after  the  Franco-Prussian  War. 


354 


CHAPTER   XVII 

CONVERTIBLE   PAPER   CURRENCY 

REFERENCES  :  Conant,  C.  A.,  History  of  Modern  Banks  of 
Issue,  Ch.  i ;  Dunbar,  C.  F.,  Theory  and  History  of  Banking,  Ch. 
5  ;  Gilbart,  J.  W.,  History,  Principles,  and  Practice  of  Banking, 
Vol.  I.,  Ch.  10 ;  Jevons,  W.  S.,  Money  and  the  Mechanism  of  Ex- 
change, Chs.  1 6,  17  ;  Laughlin,  J.  L.,  Principles  of  Money,  Ch.  13  ; 
Macleod,  II.  D.,  The  Theory  and  Practice  of  Banking,  Vol.  I.,  Ch. 
4;  Nicholson,  J.  S.,  Banker's  Money;  Scott,  W.  A.,  Money  and 
Banking,  Chs.  7-9;  Walker,  F.  A.,  Money,  Pt.  III.;  White,  H., 
Money  and  Banking,  ad  ed.,  Bk.  III. 

1.  By  whom  Convertible  Paper  Notes  are 
Issued.  —  By  convertible  paper  currency  is  meant 
paper  for  which  the  party  who  issues  it  will 
pay  specie  on  demand.  The  holder,  therefore, 
has  a  medium  of  payment  of  the  same  value  as 
the  amount  of  gold  called  for,  and  is  saved  the 
inconvenience  of  handling  the  metal.  Paper  pay- 
able with  any  other  commodity  than  specie  is  not 
properly  called  convertible.  Such  paper  may,  as 
a  matter  of  fact,  pass  in  exchange  for  gold,  or 
goods,  without  depreciation  ;  but  the  cause  of  its 
so  passing  is  not  that  it  is  secured  by  land,  goods, 
or  what  not. 

As  to  its  origin,  convertible  paper  is  usually 
put  out  by  banks.  Sometimes,  however,  it  is  a 

355 


MONEY 

government  issue,  like  our  own  United  States 
notes  or  greenbacks,  at  the  present  time.  In  the 
latter  case,  the  action  of  the  government  in  issue 
and  redemption  partakes  of  the  nature  of  banking, 
and  the  government  is  said  by  critics  of  this  ser- 
vice to  be  in  the  banking  business. 

Convertible  paper  currency,  when  issued  by  a 
government,  may  be  put  out  against  the  specific 
deposit  of  a  sum  of  gold,  or  silver,  as  the  case  may 
be,  equal  to  the  amount  called  for  by  the  notes 
and  actually  held  on  deposit  for  fheir  redemption ; 
or  it  may  be  issued  without  specific  pledge,  on  the 
general  credit  of  the  government.  The  former 
notes  are  really  certificates  of  deposit,  of  the  na- 
ture of  warehouse  receipts,  and  constitute  what  is 
called  representative  money  in  this  book.  The 
gold  and  silver  certificates  issued  by  the  United 
States  Treasury  are  good  examples  of  this  kind 
of  paper.  In  the  case  of  treasury  notes,  like  the 
greenbacks,  the  government  does  not  keep  specie 
equal  to  the  value  of  the  outstanding  issues,  nor 
does  it  retire  the  notes  when  presented  for  redemp- 
tion or  in  payment  of  public  dues.  It  treats  them 
as  money,  paying  them  out  again  in  discharge  of 
its  obligations,  but  guarantees  their  redemption  in 
metallic  money  on  demand,  and  keeps  on  hand  a 
certain  amount  of  specie  for  this  purpose. 

2.   The  Advantages  of  Government  Convertible 

Currency. — The    advantages    to    the    people,    of 

the  use  of    government  convertible  currency,  are 

those  common  to  all  paper  money :  the  saving  of 

356 


CONVERTIBLE  PAPER  CURRENCY 

capital  in  the  production  of  gold  and  silver,  the 
prevention  of  wear  of  the  coins,  and  the  greater 
convenience  of  paper.  The  advantage  to  the  gov- 
ernment is  the  fiscal  one  of  securing  a  certain 
amount  of  revenue  without  resorting  to  ordinary 
forms  of  taxation.  Over  against  this  fiscal  advan- 
tage must  be  set  the  expense  of  getting  and  main- 
taining the  specie  reserve  necessary  to  insure 
prompt  redemption  of  the  notes.  This  expense 
increases  the  more  frequent  and  large  the  presen- 
tation of  notes  for  redemption.  Moreover,  the 
likelihood  of  frequent  and  voluminous  redemption 
endangers  the  whole  system  of  government  note 
issue.  For  the  specie  reserve  cannot  be  quickly 
increased  to  meet  unusual  demands.  It  can  be 
enlarged  only  from  taxation,  or  from  the  sale  of 
bonds ;  but  taxation,  aside  from  being  too  slow 
to  answer  the  purpose,  would  have  to  be  increased 
to  meet  the  extra  payments  and  would  thus  wipe  out 
the  profit  of  note  issue.  The  sale  of  bonds  would 
be  open  to  the  same  objections.  The  interest 
charges  would  very  likely  be  much  greater  than 
any  profit  arising  from  the  paper  issues. 

In  order  to  avoid  the  danger  of  being  confronted 
with  a  demand  for  redemption  beyond  the  power 
of  the  treasury  to  meet,  the  amount  of  convertible 
paper  is  usually  limited  by  law.  This  limitation, 
together  with  the  mode  of  issue,  deprives  govern- 
ment paper  of  the  power  automatically  to  vary  in 
volume  with  the  need  of  business  men  for  currency. 
The  treasury  notes  are  put  out  in  payment  of  gov- 
357 


MONEY 

ernment  dues;  they  cannot  be  put  into  circulation 
as  loans  to  people  who  need  more  money  to  carry 
on  trade.  Hence  they  lack  a  very  important  char- 
acteristic which  attaches  to  convertible  paper  issued 
under  suitable  provisions  by  banks.  Government 
paper  does  not  possess  the  quality  of  elasticity ; 
bank  paper  does. 

3.  Convertible  Bank  Paper.  —  A  bank  note  is  a 
note  given  out  by  a  bank,  promising  to  pay  in  stand- 
ard, or  in  legal-tender,  money,  the  amount  specified 
on  its  face.  These  notes  get  into  circulation  in 
this  way  :  a  customer  may  deposit  metallic  money 
with  his  bank  and  receive  in  exchange  the  more 
convenient  notes ;  or,  more  commonly,  he  may 
give  his  own  promissory  note,  or  a  bill  of  ex- 
change to  his  banker,  and  receive  in  exchange  the 
notes  of  the  bank.  In  doing  this  he  exchanges  his 
own  credit  for  that  of  the  bank.  Being  a  merchant, 
for  example,  he  has  incurred  debts  which  he  cannot 
at  the  moment  pay.  He  could  offer  his  creditors 
his  promissory  notes ;  but  they,  like  him,  are  in 
debt,  and  want  a  medium  of  payment  which  they 
can  pass  on  to  their  creditors  in  turn.  His  credit 
is  not  well  enough  established,  or  known,  to  admit 
of  his  notes  passing  current.  But  it  is  well  known 
at  the  bank,  and  that  of  the  bank  is  well  established 
throughout  the  community  in  which  the  circle  of 
indebtedness  just  described  prevails.  Hence  the 
promissory  notes  of  the  bank  will  be  accepted 
widely  in  payment.  Therefore  the  merchant  in 
question  exchanges  his  promissory  notes  for  those 
358 


CONVERTIBLE  PAPER  CURRENCY 

of  the  bank  in  convenient  denominations,  and  with 
them  pays  his  debts.  The  process  is  simply  an 
exchange  of  credit  of  narrow  circulation,  or  accept- 
ability, for  credit  of  wider  circulation  or  accepta- 
bility. The  bank  notes  therefore  pass  from  hand 
to  hand  and  perform  the  services  of  exchange,  as 
does  standard  money.  Of  course  the  bank  keeps 
on  hand  a  sufficient  reserve  of  specie  to  redeem 
these  notes  as  they  are  presented  to  it. 

Bank  notes  are  now  commonly  issued  in  the 
second  way  described,  that  is,  by  way  of  discount. 
Business  men  in  need  of  cash  take  their  promissory 
notes,  or  bills,  to  the  bank.  The  bank  buys  these 
with  its  own  notes,  charging  for  the  exchange  the 
interest  on  the  amount  at  current  rates  for  the 
period  during  which  the  customer's  notes  run. 
This  charge  is  collected  in  advance  and  is  called  dis- 
count, and  the  process  is  known  as  discounting  the 
customer's  notes  or  bills.  The  term  "discounts"  is 
also  applied  to  the  advances  thus  made  by  the  bank. 

4.  The  Meaning  of  the  Term  "Elasticity  "as  applied 
to  Convertible  Paper  Currency.  —  It  is  evident  that 
the  amount  of  the  bank's  discounts  is  determined 
by  the  volume  of  the  notes  and  bills  offered  by  its 
customers  for  bank  notes.  That  volume  depends, 
in  turn,  on  the  need  of  business  men  for  currency. 
Hence  the  note  issues  of  the  bank  are  ultimately 
fixed  by  the  demand  of  the  business  of  the  com- 
munity, and  vary  with  this  demand.  This  power 
of  bank  notes  to  adjust  their  volume  to  the  need 
for  currency  is  called  elasticity. 

359 


MONEY 

The  exact  meaning,  the  desirability,  and,  indeed, 
the  existence  of  what  is  called  elasticity  have  long 
been  much  disputed.  It  was  the  debate  on  this 
topic,  and  on  its  corollary  doctrine  of  the  true 
theory  of  the  management  of  paper  issues,  which 
occurred  in  England  during  the  second  decade 
of  the  nineteenth  century  that  gave  to  the  world 
the  famous  Report  of  the  Bullion  Committee ; 
and,  a  little  later,  a  series  of  papers  on  the  subject 
unsurpassed  for  the  brilliancy  and  exhaustiveness 
of  their  treatment.  By  elasticity  is  commonly 
meant  the  quality  of  a  body  by  virtue  of  which  it 
can  resume  its  previous  size  and  shape,  when  these 
have  been  changed  by  temporary  pulling  or  com- 
pression. If  applied  strictly  to  money,  the  term, 
accordingly,  should  mean  that  the  existing  volume 
of  money  should  do  more  service  under  the  tension 
of  additional  demand,  and  less  on  the  relaxation  of 
demand.  As  ordinarily  used,  however,  elasticity  of 
money  means  the  power  of  the  volume  of  money 
to  increase  and  decrease  with  changing  demand. 
These  two  meanings  are  not  the  same,  and  some  con- 
fusion has  arisen  from  failure  to  notice  their  differ- 
ence. The  difficulty  arises  from  using  the  terms 
of  physics  in  connections  where  their  use  can  be 
only  figurative. 

When  a  demand  for  money  becomes  more  intense 
at  one  place  than  at  another,  under  a  system  of 
metallic  money,  the  metal  leaves  the  place  of  less 
intense  for  that  of  more  intense  demand.  Its 
total  quantity,  however,  is  not  increased.  Under 

360 


CONVERTIBLE  PAPER  CURRENCY 

a  system  of  convertible  paper,  an  increased  local 
demand  for  money  is  met  by  the  issue  of  more 
paper,  not  by  the  transfer  of  some  from  another 
place.  If  we  are  to  resort  to  physical  analogies, 
the  proper  term  for  the  characteristic  under  dis- 
cussion would  be  fluidity,  or  mobility,  in  the  case 
of  the  metallic  money,  and  variability  of  volume 
in  the  case  of  paper.  The  so-called  elasticity  of 
gold  money  means  a  changed  distribution  ;  that  of 
paper  money  implies  a  larger  or  smaller  volume 
than  before,  in  some  place  or  places,  but  not  at  the 
expense  of  the  supply  of  any  other  place.  Metallic 
money  has  fluidity,  not  elasticity;  convertible  paper 
money  has  fluidity  only  to  the  extent  that  it  flows 
to  its  centres  of  redemption  and  not  to  centres  of 
demand  for  money,  if  this  demand  is  elsewhere 
than  at  the  points  of  redemption.  If,  then,  either 
kind  of  money  has  elasticity,  in  the  sense  of  varia- 
bility of  volume  under  pressure,  it  is  convertible 
paper.  It  is  the  possibility  and  desirability  of  this 
quality  of  variability  over  and  above,  or  otherwise 
than,  that  of  metallic  money  that  has  been  the 
subject  of  warm  discussion  in  the  theory  of 
convertible  paper  money. 

5.  On  the  Desirability  of  Elasticity. — Of  the 
desirability  of  having  a  currency  that  is  elastic,  or 
variable  in  volume,  rather  than  merely  fluid,  or 
mobile,  there  is  little  doubt.  There  are  certain 
local  needs  for  an  increased  amount  of  money, 
dependent  on  the  seasons  and  the  kind  of  industry. 
The  seasonal  demands  of  agricultural  communities 
36! 


MONEY 

have  long  been  well  known.  With  an  elastic  cur- 
rency, like  bank  credits,  these  demands  can  be  met 
without  an  extra  strain  on  the  money  supply  else- 
where, and  without  the  expense  of  transferring 
specie.  Bank  notes  serve  the  purpose  better  than 
deposits  subject  to  check,  because  the  people  who 
want  the  seasonal  extra  supply  of  currency  are  too 
far  from  banks  ;  they  receive  and  spend  sums  too 
small  to  make  their  accounts  profitable  to  a  bank, 
and  they  are  more  or  less  unaccustomed  to  the 
business  procedure  connected  with  keeping  active 
bank  accounts.  The  currency  is  wanted  largely  to 
pay  wages  and  small  accounts. 

It  is  urged  by  those  who  oppose  elasticity  of  the 
medium  of  exchange,  that  these  local  and  seasonal 
demands  do  not  occur  everywhere  at  the  same 
time ;  that  when  the  demand  for  the  medium  of 
exchange  at  one  place  is  strong,  it  is  weak  at  some 
other  place.  Hence,  it  is  argued,  no  addition  to 
the  currency,  but  simply  a  transfer  of  part  of  it,  is 
necessary.  There  is  some  force  in  this  statement, 
but  the  fact  that  money  may  flow  from  a  place  of 
slack  demand  to  one  of  intenser  demand  does  not 
disprove  the  advisability  of  supplying  additional 
currency,  unless  it  can  be  shown  that  the  amount 
transferred  is  sufficient,  without  causing  strain 
elsewhere.  Moreover,  the  expense  of  transfer 
may  be  greater  than  that  of  additional  local  bank 
issues,  and  the  necessary  supply  should  come  by 
transfer  only  if  that  be  less  expensive ;  otherwise, 
additional  issues  should  be  made. 
362 


CONVERTIBLE    PAPER    CURRENCY 

It  is  also  urged  that  the  stronger  demand  for 
money  will  cause  a  greater  rapidity  of  circulation 
of  the  existing  money  supply,  and  therefore  make 
an  additional  supply  unnecessary.  This  is  true, 
provided  the  increased  efficiency  of  the  existing 
money  supply  suffices  to  satisfy  the  demand.  But 
this  argument,  like  the  preceding,  simply  says  that 
there  are  other  ways  of  meeting  the  demand.  The 
reply  is  that  from  the  variety  of  ways  society  will 
choose  the  one  which  is  adequate  and  most  effective, 
its  expensiveness  being  considered. 

It  is  argued  further,  that  no  attempt  should  be 
made  to  supply  the  demand  for  extra  medium  of 
exchange  for  seasonal  and  similar  reasons,  because 
it  is  better  to  let  the  stringency  be  felt  in  order  to 
check  speculation.  This  contention  also  has  some 
force ;  but  these  demands  are  not  always  specula- 
tive, and  in  so  far  as  they  are  not,  the  argument  is 
beside  the  point. 

6.  The  Banking  Theory  and  the  Currency  Theory 
of  Note  Issue.  —  The  different  opinions  held  con- 
cerning the  elasticity  of  bank  notes  have  given 
rise  to  two  theories  of  the  proper  mode  of  issue 
and  management  of  such  paper.  One  theory  holds 
that  the  paper  issues,  if  kept  always  convertible, 
cannot  be  issued  in  excess ;  that,  consequently, 
they  cannot  depreciate,  and  that  they  will,  under 
this  condition,  behave  just  as  a  like  amount  of 
metallic  money  would  do,  and,  with  good  banking, 
will  always  be  safe.  This  is  known  as  the  banking 
theory.  According  to  this  theory,  if  the  notes  are 
363 


MONEY 

always  kept  convertible,  and  are  in  fact  constantly 
redeemed  in  specie,  no  precaution  is  necessary  to 
prevent  their  excessive  issue  and  depreciation, 
except  good  banking,  the  refusal  to  discount  paper 
which  is  not  wholly  good,  based  on  sound  trade 
transactions,  and  made  by  men  of  integrity  in 
business. 

Opposed  to  this  view  is  the  theory  that  bank 
paper  can  vary  in  volume  independently  of  the 
gold  and  silver  whose  place  it  takes  ;  that  it  can  be 
put  in  circulation  in  excess  of  the  specie  which 
would  replace  it  in  a  wholly  metallic  system,  be- 
cause as  fast  as  it  is  put  out  it  will  inflate  prices  in 
proportion  to  its  quantity  and  so  cause  a  demand 
for  additional  issues.  This  is  known  as  the  cur- 
rency theory. 

The  currency  principle  insists,  contrary  to  the 
banking  principle,  that  good  banking  and  constant 
convertibility  are  not  sufficient  to  prevent  over- 
issue, depreciation,  and  inflation ;  that,  on  the  con- 
trary, the  great  influence  of  banks  enables  them 
to  put  their  notes  into  circulation  in  excess  of  the 
specie  which  these  displace ;  and  that  conse- 
quently the  mixed  currency  of  gold  and  paper 
will  vary  in  purchasing  power  in  a  way  different 
from  that  which  would  be  shown  by  the  purely 
metallic  currency  to  whose  behavior,  according 
to  the  theorists  of  both  schools,  the  mixed  paper 
and  gold  currency  ought  to  conform.  According 
to  this  theory,  bank  currency  must,  therefore,  be 
regulated  so  as  to  prevent  its  issue  in  excess  of 
364 


CONVERTIBLE    PAPER    CURRENCY 

the  specie  it  displaces,  or  represents.  From  the 
view-point  of  the  currency  theorist  the  function 
of  the  bank,  as  a  note-issuing  agency,  is  merely  to 
exchange  credit  for  specie  and  specie  for  credit. 
To  prevent  the  issue  of  notes  beyond  the  specie 
displaced,  the  amount  must  be  restricted  by  re- 
quiring some  kind  of  special  security. 

7.  The  Power  of  a  Bank  to  force  its  Paper  into 
Circulation.  —  Despite  the  clearness  and  conclu- 
siveness  of  the  proof  of  the  truth  of  the  banking 
principle,  and  despite  its  acceptance  by  most  au- 
thorities on  the  subject,  it  is  the  currency  theory 
which  has  in  the  main  been  put  into  practice. 
The  Bank  of  England,  the  Reichsbank  of  Ger- 
many, and  the  national  banks  of  the  United 
States  are  all  organized,  as  note-issuing  institu- 
tions, on  the  currency  theory.  Their  issues  are 
limited  and  safeguarded  by  various  devices.  The 
Bank  of  France,  on  the  other  hand,  is  an  excellent 
illustration  of  an  institution  founded  on  the  bank- 
ing principle.  The  experience  of  all  these  banks 
has  furnished  evidence  so  strong  as  to  be  conclu- 
sive in  support  of  the  truth  of  the  banking  prin- 
ciple, and  the  fallacy  of  its  rival.  The  aim  of  the 
banks  operated  on  the  currency  theory  is  to  ex- 
change paper  for  gold  and  gold  for  paper,  to  let 
no  paper  into  circulation  except  as  gold  is  taken 
out,  and  to  issue  no  gold  except  in  exchange  for 
notes  paid  in,  so  that  the  stock  of  money  may  be 
kept  exactly  the  same  as  it  would  be  if  wholly 
metallic.  It  is  not  necessary  to  quote  figures  from 

365 


MONEY 

the  history  of  the  currency-theory  banks  to  show 
that  they  have  not  been  able  to  do  this  ;  nor  to 
recite  all  the  arguments  whereby  the  Bullion  Com- 
mittee and  their  adherents  proved  that  it  could  not 
be  done.  These  arguments  got  their  color  from 
the  fact,  which  somewhat  obscured  the  points  in 
dispute,  that  note  issue  was  a  far  more  important 
form  of  discount  at  the  time  of  the  great  debate 
than  it  is  now. 

At  that  time  it  was  the  note-issuing  function  of 
banks  that  was  thought  to  be  their  most  important 
social,  and  their  most  profitable  private,  service. 
The  belief  in  the  potency  of  bank  notes  to  affect 
the  public  welfare  was  long  the  chief  inspiration 
of  bank  legislation,  and  led  to  the  enactment  of 
many  laws  directed  to  control  the  banks  in  the 
exercise  of  this  power.  Long  rows  of  Blue  Books 
and  congressional  documents  and  treatises  on  this 
subject  fill  the  shelves  of  our  libraries,  silent  wit- 
nesses to  the  belief  of  our  fathers  and  grandfathers 
that  as  banks  increased,  so,  too,  would  grow  the 
importance  of  this  particular  function.  How  dif- 
ferent is  the  fact  from  the  expectation !  The 
check,  not  the  note,  is  to-day  the  symbol  of  bank- 
ing progress,  the  instrument  of  large  exchange. 
On  January  22,  1904,  the  outstanding  notes  of  the 
national  banks  of  the  United  States  amounted  to 
$380,992,307,  while  the  individual  deposits,  subject 
to  check,  were  $3,300,619,898.  It  is  the  deposit 
and  the  check  that  we  must  reckon  with  to-day. 
But  the  change  of  form  of  the  bank  function  has 
366 


CONVERTIBLE  PAPER  CURRENCY 

not  changed  its  character.  When  a  bank  buys  a 
piece  of  mercantile  paper,  by  discounting  a  bill 
of  exchange  or  a  promissory  note,  it  creates  a 
debt  against  itself,  whether  it  gives  its  customer 
notes,  or  credits  him  on  its  books.  To  discount  a 
piece  of  mercantile  paper  by  issuing  notes  in  pay- 
ment for  it,  differs  in  no  respect  from  discounting 
the  same  paper  and  crediting  its  seller  with  a  proper 
amount  as  a  deposit  to  be  drawn  out  by  checks  at 
the  convenience  of  the  holder.  To  ask,  therefore, 
whether  a  bank  can  issue  its  notes  in  excess  is  to 
ask  whether  it  can  sell  its  credit  in  excess  of  the 
demand  therefor.  The  answer  of  the  adherents 
of  the  banking  principle  is  in  the  negative  ;  that  if 
the  bank  discounts  good  paper,  and  meets  all  de- 
mands in  it  for  the  redemption  of  its  notes,  it  can- 
not issue  notes  or  create  deposits  to  a  degree  to 
inflate  prices.  For  banks  can  sell  their  credit 
only  by  purchasing  securities,  mercantile  or  other. 
Merchants  will  not  borrow  unless  their  business 
makes  borrowing  profitable,  nor  will  they  continue 
to  pay  interest  on  loans,  whether  of  notes  or  de- 
posits, longer  than  they  must.  Increase  of  trade, 
and  of  the  volume  of  payments,  is  not  caused  by 
an  enlarged  demand  for  currency  ;  the  enlarged 
demand  for  currency  is  a  consequence  of  the 
larger  volume  of  business.  To  say  that  currency 
can  be  issued  in  excess  of  the  demands  of  business 
is  therefore  to  reverse  cause  and  effect.  If  busi- 
ness grows  and  the  volume  of  payments  to  be 
made  enlarges,  more  means  of  exchange  must  be 
367 


MONEY 

obtained  to  settle  obligations,  whether  the  currency 
in  use  be  specie  or  paper,  and  the  increase  of  the 
medium  of  exchange  would  come  in  either  case. 
There  can  be  no  difference.  It  is  true  that  banks 
sometimes  lend  incautiously,  that  they  sometimes 
discount  paper  based  on  hazardous  undertakings, 
and  that  the  stimulation  of  industry  of  which  such 
enterprises  are  the  cause  and  the  sign  is  followed 
by,  or  accompanied  by,  an  increase  in  the  emission 
of  bank  paper.  But  this  larger  emission  is  a  re- 
sponse to  the  demand  for  increased  means  of  pay- 
ment which  such  enterprises  create.  An  expansion 
of  bank  credits  can  come,  therefore,  only  as  a 
result  of  an  expanded  demand  and  a  higher  price 
scale,  and  they  cannot  exceed  in  amount  the  specie 
they  represent,  for  this  is  the  amount  needed  to  do 
business  on  the  higher  price  scale. 

The  proper  means  of  preventing  enlarged  emis- 
sions is  to  prevent  the  unhealthful  stimulation  of 
trade  which  causes  them.  True,  it  may  be  said 
that  the  inability  to  secure  a  larger  volume  of  cur- 
rency would  check  the  unsound  business  under- 
takings. But  it  would  also  check  new  enterprises 
that  were  legitimate  and  sound.  The  limitation 
of  issues  in  order  to  prevent  inflation  from  unsafe 
enterprises  would  at  the  same  time  deprive  the 
community  of  the  very  important  advantages  which 
elasticity  of  the  currency  confers.  It  is  an  act  of 
questionable  wisdom  to  cure  one  set  of  ills  by 
creating  others,  when  the  good  can  be  obtained  in 
other  ways  without  incurring  the  harm.  Moreover, 
368 


CONVERTIBLE  PAPER  CURRENCY 

the  banker's  interest  works  against  over-issue.  If 
he  grants  credit  in  excess  of  the  legitimate  need 
of  business  for  it,  the  excess  will  return  to  him,  for 
deposit  at  interest,  or,  failing  that,  for  exchange 
into  specie.  He  will  therefore  subject  himself  to 
loss. 

8.  Some  Practical  Considerations  which  modify 
the  Above  Conclusions.  —  Such  is  the  reasoning  of 
the  banking  theory,  and  it  is  without  a  logical  flaw. 
Experience  tells  us,  however,  that  banking  is  not 
always  sound  and  careful ;  that  men  are  sometimes 
carried  away  by  extravagant  expectations  of  busi- 
ness growth ;  that  banks  and  bankers  can,  and  do, 
stimulate  this  speculative  feeling  by  making  dis- 
counts easy  and  by  lending  on  business  ventures 
that  have  no  substantial  basis  of  success  ;  that  men 
are  not  always  careful  to  insist  on  the  instant  and 
full  convertibility  of  bank  notes ;  that  banks  can 
sometimes  create  a  feeling  in  the  community  against 
insistence  on  convertibility ;  and  that,  in  conse- 
quence of  all  these  facts,  bank  issues  of  notes  or 
of  deposits  may  possibly  exceed  the  due  needs  of 
legitimate  business,  and  subject  the  community  to 
the  evils  of  a  depreciated  currency.  For  this 
reason  some  strength  is  lent  to  the  demand  that 
measures  be  taken  to  prevent  the  undue  expansion 
of  bank  credits,  of  whatever  form  ;  and  although, 
as  we  have  seen,  there  is  no  difference  in  character 
between  bank  notes  and  bank  deposits,  considered 
as  forms  of  credit,  nor  in  the  principles  which 
should  guide  banks  in  regulating  them,  their  be- 
2  B  369 


MONEY 

havior  after  issue  may  differ  so  much  as  to  make 
different  treatment  necessary. 

The  banking  principle  may  be  safely  relied  on 
for  the  control  of  the  vast  and  ever  changing  accu- 
mulation of  bank  deposits,  the  result  of  the  dis- 
count of  commercial  paper.  The  world  over,  these 
deposits  are  the  property  of  people  who  are  keen 
and  able  in  the  protection  of  their  own  interests. 
The  depositor  chooses  his  bank  and  the  form  of 
credit  which  he  will  take  from  it.  He  is  in  a  posi- 
tion to  judge,  with  at  least  reasonable  certainty,  of 
the  soundness  of  his  bank  and  the  character  of  its 
management.  He  is  in  close  touch  with  it,  he  can 
close  his  account  with  it  at  short  notice,  with 
little  trouble.  Deposit  currency,  in  short,  is  per- 
fectly suited  to  a  commercial  community,  with  its 
highly  organized  business  relations,  the  close  con- 
tiguity of  its  members,  and  its  rapid  means  of  com- 
munication. For  these  conditions,  which  are  the 
very  ones  that  need  and  favor  a  currency  of  the 
highest  mobility,  furnish  at  the  same  time  protec- 
tion against  its  possible  evils. 

The  case  of  note  issues  is  somewhat  different. 
The  notes,  if  they  are  to  answer  their  purpose,  will 
frequently,  indeed  usually,  come  into  the  hands  of 
people  who  have  no  means  of  judging  whether 
they  are  good  or  bad,  and  may  never  have  heard 
of  the  bank  which  put  them  out.  It  will  not  do 
to  say  that  people  are  not  obliged  to  take  bank 
notes,  because  to  refuse  them  would  be,  in  many 
instances,  to  injure  themselves  in  a  business  way. 
370 


CONVERTIBLE  PAPER  CURRENCY 

Wage-earners,  for  example,  would  find  it  rather 
hard  to  refuse  such  paper.  But  it  is  precisely  the 
economically  helpless  in  such  matters  who  are  most 
commonly  the  victims  of  fraud  or  error.  For  these 
reasons  the  note  form  of  bank  credit,  if  abused  by 
bad  management  or  over-confidence,  is  likely  to  do 
more  harm  than  is  the  deposit  form.  "  In  a  coun- 
try where  there  is  one  chief  bank,  possessing  an  im- 
mense capital  and  unbounded  confidence,  the  notes 
of  such  a  bank,  even  if  payable  in  gold,  may  be  issued 
to  such  an  extent  as  to  cause  an  advance  in  prices, 
until  an  unfavorable  course  of  the  exchange  shall 
cause  payment  of  the  notes  to  be  demanded  in 
gold."  l  The  same  condition  may  be  brought  about 
where  the  banks  of  issue  are  numerous  and  possess 
the  confidence  of  the  community.  The  notes  get 
into  the  hands  of  people  who  have  no  interest  in  de- 
manding redemption.  They  are  scattered  through 
the  community  in  comparatively  small  amounts,  so 
that  an  individual  holder  would  gain  nothing  by 
depositing  his  holdings.  Moreover,  the  trouble  of 
making  the  deposits,  where  population  is  scattered, 
would  act  as  a  check  on  contraction.  These  con- 
ditions are  more  likely  to  be  found  in  an  agricul- 
tural community  than  elsewhere,  and  probably  had 
much  to  do  with  the  inflation  caused  by  the  wretched 
issues  of  our  earlier  state  banks. 

Practical  necessities,  therefore,  justify   the    de- 
mand for  some  safeguarding  of  convertible  bank 

1  Gilbart,  "  History,  Principles,  and  Practice  of  Banking,"  Vol.  I., 
p.  150. 

371 


MONEY 

paper,  the  need  for  which  the  economic  principle 
correctly  enough  denies.  The  theory  is  sound  and 
its  principle  is  the  one  which  must  be  followed  to 
enable  banks  to  accomplish  the  purpose  of  their 
existence.  But  human  nature  and  some  social 
conditions  may  interfere  with  its  operation,  and 
some  people  who  are  expected  to  be  guided  by  it 
may  occasionally  find  their  temporary  interests 
promoted,  or  apparently  promoted,  by  violating  it. 
The  public  evils  that  flow  from  its  violation,  or  from 
friction  in  its  working,  justify  the  community  in 
insisting  on  safeguards  against  them.  On  these 
grounds  only  can  be  found  any  defence  for  the 
claims  of  the  currency  principle  that  note  issues 
should  in  some  way  be  regulated  by  law. 

9.  Provision  of  Proper  Safeguards  for  Note 
Issue.  —  All  these  arguments,  however,  do  not 
justify  the  requirement  of  the  currency  theorists 
that  the  amount  of  convertible  paper  currency 
should  be  fixed  by  law.  They  justify  merely  the 
insistence  on  safeguards  which  will  leave  issues 
free  for  all  legitimate  business  needs,  while  pro- 
viding against  the  evil  effects  of  expansion  to  meet 
illegitimate  needs.  The  arguments  justify  regu- 
lation, not  a  priori  definite  limitation.  For  the 
legislator  cannot  determine  beforehand  what  issues 
are  proper  and  what  are  not.  He  must  leave  that 
to  the  banker  to  decide  as  occasion  arises.  The 
banker  must  be  left  unhampered  to  extend  his 
credit,  whether  by  note  issues  or  deposits,  to  what- 
ever amount  is  called  for  by  the  securities  created 

372 


CONVERTIBLE  PAPER  CURRENCY 

by  commercial  transactions,  and  presented  to  him 
for  discount.  The  owners  of  the  securities,  the 
business  men  of  the  community,  are  the  best  judges 
of  what  form  should  be  taken  by  the  bank  credit 
which  they  want.  The  only  interference  which  is 
economically  justifiable,  then,  is  the  institution  of 
proper  safeguards  against  the  abuse  of  the  credit- 
issuing  power  of  banks,  and  against  the  evil  effects 
of  this  abuse  on  the  public  when  it  occurs.  The 
whole  matter  has  to  do,  not  with  limitation,  but 
with  the  insistence  that  the  banker  shall  regulate 
his  note  issues  properly. 

10.  Regulation  of  Note  Issues  by  limiting  their 
Volume.  —  There  are  many  methods  of  regulating 
convertible  note  issues  in  the  interest  of  safety, 
but  the  principal  ones  may  be  grouped  into  these 
classes  :  those  which  act  directly  on  the  notes ; 
those  which,  without  limiting  the  volume  of  issue, 
provide  for  its  safety  by  acting  on  the  reserve  ; 
those  which  provide  special  security,  apart  from 
the  reserve ;  and  those  which  support  the  notes 
simply  with  the  general  credit  of  the  issuer. 

The  plan  of  regulation  which  acts  directly  on 
the  notes  consists  merely  in  fixing  a  maximum 
limit  to  their  volume.  The  theory  of  this  limita- 
tion is  that  a  certain  amount  of  money  is  always 
needed  by  the  business  community ;  that  this 
amount,  of  whatever  kind  of  currency  it  may  con- 
sist, will  always  be  equivalent  to  gold,  because  it 
never  exceeds  the  demand  for  money  on  the  pre- 
vailing scale  of  prices.  This  money,  it  is  said, 

373 


MONEY 

may  as  well  be  paper,  since  there  will  never  be  any 
call  for  its  conversion  into  gold  to  any  large  extent, 
and  the  other  kinds  of  currency  in  use  furnish  all 
the  leeway  necessary  to  accommodate  changes  in 
trade  and  in  demand  for  specie  for  export.  It  is  on 
this  principle  that  the  government  of  Canada  sup- 
plies the  small  bills  current  in  daily  business,  and 
restricts  the  bank  to  the  issue  of  notes  of  denomi- 
nations of  over  five  dollars.  Our  own  greenbacks 
now  occupy  a  somewhat  similar  place  in  our  mone- 
tary system.  The  objection  to  this  mode  of  regu- 
lation has  already  been  set  forth  in  the  criticism  of 
the  currency  theory.  The  currency  thus  furnished 
has  no  elasticity,  and  no  real  correspondence  with 
the  demands  of  trade. 

11.  Regulation  of  Note  Issues  by  controlling 
Reserve.  —  The  second  group  of  methods  for 
regulating  convertible  paper  money  consists  of 
those  which  operate  on  the  reserve,  instead  of 
directly  on  the  issues.  The  law  may  require  banks 
to  protect  their  notes  by  keeping  on  hand  a  fixed 
minimum  amount  of  specie,  or  a  stock  of  specie 
equal  to  the  notes  afloat,  or  equal  to  a  certain  pro- 
portion of  these  notes.  Instead  of  specie,  the  law 
may  require  the  holding  of  a  reserve  of  securities, 
as  bonds,  stocks,  and  commercial  paper.  The 
amount  of  these  paper  securities  may  be,  as  in  the 
case  of  a  specie  reserve,  a  fixed  minimum,  or  equal 
to  the  whole  issue,  or  to  a  certain  proportion  of  it. 
As  Professor  Jevons  has  pointed  out,  these  methods 
of  regulation  may  be  combined  in  various  ways. 
374 


CONVERTIBLE  PAPER  CURRENCY 

12.  The  Minimum  Reserve  Method.  —  The  mini- 
mum reserve  method  of  regulation,  which  requires 
that  a  fixed  amount  of  specie  shall  be  on  hand  at 
all  times,  whatever  the  amount  of  notes  afloat,  is 
prejudicial  to  good  management,  and  under  some 
conditions  affords  but  slight  protection.  The  pur- 
poses of  a  reserve  are  to  protect  the  bank  against 
danger  of  failure  to  redeem  its  obligations,  and  to 
afford  relief  to  people  who  need  money  when  it  is 
hard  to  get.  If,  however,  the  bank  be  required  to 
keep  its  reserve  intact,  these  purposes  are  defeated 
at  the  time  when  the  need  for  their  accomplish- 
ment is  greatest.  Such  a  plan  virtually  means 
that  banks  must  redeem  their  obligations  until 
their  reserves  fall  to  a  certain  point,  and  must  not 
do  so  beyond  that  point.  It  may,  of  course,  be 
said  that  the  bank  is  legally  and  morally  bound  to 
keep  its  reserve  at  sufficient  height  to  preclude  the 
danger  of  its  falling  to  the  fixed  minimum.  Yet 
there  is  a  certain  inconsistency  in  saying  that  a 
reserve  sufficient  for  all  demands  must  always  be 
kept;  but  if  it  should  not  be  sufficient,  then  re- 
demption must  cease.  It  is  like  telling  a  boat  load 
of  shipwrecked  people  that  they  may  row  for  the 
shore  while  they  have  two  oars,  but  must  cease  their 
efforts  if  one  of  them  is  lost  or  broken.  Such  a 
restriction  on  redemption  would  very  likely  in- 
crease the  difficulties  of  the  community  in  a  time 
of  business  distress.  If,  at  such  a  time,  the  re- 
serve held  against  the  notes  approaches  the  mini- 
mum fixed  by  law,  the  fear  of  some  people  that 

375 


MONEY 

the  notes  they  have  may  not  be  redeemed  will 
cause  a  sudden  increase  of  the  demand  for  re- 
demption, and  precipitate  the  evil  the  reserve  is 
designed  to  prevent. 

13.  Proportional  Reserve  Method.  —  Similar  ob- 
jections may  be  made  to  the  proportional  reserve 
method.     A  demand  for  the  payment  of  a  consid- 
erable amount  of  notes  may  reduce  the  reserve  to 
a  quantity  equal    to   the    legal  proportion  of   the 
notes   still   left   in    circulation.     In    that   case  no 
more  could  be  paid,  and  the  proportional  reserve 
would  be  virtually  a  fixed  minimum  reserve.     For 
example,  if  the  amount  of  notes  in  circulation  is 
$60,000,  and  the  reserve  required  by  law  is  one- 
third  of  the  issue,  or  $20,000,  the  redemption  of 
$15,000  of  the  notes  would  reduce  the  outstanding 
amount   to    $45,000;    but   the    reserve   would   be 
lessened  by  a  similar  amount  and  would  become 
$5000,  an  amount  less  than  the  legal  requirement. 
Whatever    advantage     the     proportional    reserve 
method    has    over   that    of    a   minimum     reserve 
comes  from  fixing  the  reserve  at  a  high    propor- 
tion of  the  total  issue.     But  while  a  large  reserve 
would   better   insure   the   safety  of   the   notes,  it 
would  pari passu  defeat  the  main  purpose  of  using 
paper,  namely,  the  saving  of  investment  in  metal- 
lic money. 

14.  Simple  Deposit  Method. —  The  plan  of  keep- 
ing on  hand  a  stock  of  specie  equal  to  the  whole 
amount   of    notes    issued,    known    as    the    simple 
deposit  method,  gives  the  notes  the  character  of 


CONVERTIBLE    PAPER    CURRENCY 

warehouse  receipts,  or  certificates  of  deposit, 
which  have  been  already  described.  Such  paper 
is  certainly  safe  if  the  warehouse  man  is  honest ; 
but  it  possesses  none  of  the  advantages  claimed 
for  bank  money,  except  the  mere  saving  of  the 
wear  of  the  coins.  Moreover,  under  an  autocratic 
government,  or  a  government  which  can  control 
the  management  of  the  bank  of  issue,  such  a  stock 
of  specie  is  a  sore  temptation  to  the  authorities  in 
times  of  treasury  distress.  Historical  instances 
of  the  seizure  of  such  deposits  are  not  wanting. 
Those  of  the  Bank  of  Amsterdam  were  secretly 
loaned  to  the  government  of  Holland  prior  to  the 
French  invasion  of  1795.  The  English  govern- 
ment borrowed  the  gold  of  the  Bank  of  England 
in  1797  by  causing  a  suspension  of  specie  pay- 
ments ;  and  that  of  France  took  a  similar  step 
with  reference  to  the  specie  in  the  Bank  of  France 
in  1870. 

15.  The  Partial  Deposit  Method.  —  By  what 
Jevons  has  called  the  partial  deposit  system,  a 
certain  part  of  the  notes  are  issued  against  stocks, 
bonds,  and  other  securities,  and  further  issues 
must  be  protected  by  the  deposit  of  specie,  dollar 
for  dollar.  This  is  the  method  employed  by  the 
Bank  of  England,  which  is  permitted  by  law  to 
put  out  a  maximum  of  £i 7, 500,000 l  of  notes  on 
the  security  of  government  bonds.  One  advantage 

1  The  amount  was  originally  ,£14,000,000,  but  has  been  increased 
by  the  lapsed  circulation  of  country  banks  which  have  ceased  to 
issue  notes. 

377 


MONEY 

of  this  system  is  that  as  the  amount  of  outstanding 
notes  increases,  the  proportion  of  specie  reserve  to 
the  whole  issue  increases,  and  thus  insures  greater 
safety  to  the  whole.  But  this  safety  is  obtained 
at  the  expense,  to  some  extent,  of  whatever  advan- 
tage in  the  way  of  elasticity  is  furnished  by  bank 
notes  proper. 

16.  The  Bond-deposit  Method. — Under  the  bond- 
deposit  system  the  notes  are  secured  by  the  stocks 
and  bonds  of  governments.  The  notes  of  the 
national  banks  of  the  United  States  are  thus  se- 
cured. The  banks  are  required  by  law  to  pur- 
chase bonds  of  the  United  States  with  their  capital 
stock.  These  bonds  are  deposited  with  the  treas- 
urer of  the  United  States  at  Washington,  and  the 
banks  receive  in  return  notes  equal  in  amount  to 
the  par  value  of  the  bonds,  but  not  in  excess  of 
their  market  value,  nor  of  the  capital  stock  of  the 
bank. 

There  are  several  serious  objections  to  the  plan 
of  securing  note  issues  with  public  stocks.  In  the 
first  place,  the  bond  security,  by  itself,  does  not 
insure  convertibility  in  the  proper  sense.  It  pro- 
vides for  ultimate  redemption,  but  not  for  that 
immediate  payment  in  gold,  on  demand,  which  is 
essential  to  business.  Our  own  national  bank 
notes  may  be  paid  in  treasury  notes,  and  these 
in  turn  may  be  presented  to  the  treasury  for  gold. 
Evidently  the  bank  notes  command  gold  only  so 
long  as  the  treasury  notes  do  so.  Hence,  our  bank 
notes  are  convertible,  not  because  their  redemption 
37S 


CONVERTIBLE  PAPER  CURRENCY 

as  bank  notes  is  properly  provided  for,  but  because 
the  government  is  solvent.  However,  even  if  the 
law  did  not  provide  for  the  payment  of  national 
bank  notes  with  government  paper;  if,  in  other 
words,  the  banks  were  required  to  redeem  their 
notes  directly  in  gold,  the  possession  of  bonds  and 
other  securities  would  not  be  a  guarantee  of  their 
ability  to  do  so,  nor  a  sure  means  of  enabling  them 
to  do  so.  The  bonds  would  have  to  be  sold  to  get 
gold  to  pay  the  notes.  At  a  time  of  monetary 
stringency  the  holders  of  the  notes  present  them 
to  get  gold  because  the  need  for  the  metal  is 
great.  If  the  banks  must  sell  their  securities  to 
get  this  gold,  the  price  of  the  securities  is  likely  to 
be  forced  down,  and  that  of  gold  raised,  at  a  time 
when  the  need  for  it  is  greatest. 

A  second  objection  to  the  bond-deposit  system 
is  that  the  purchase  of  the  bonds  uses  the  real 
capital  of  the  bank  in  procuring  its  notes  by  in- 
vestment, instead  of  leaving  it  free  for  discounting 
commercial  paper,  which  is  the  purpose  for  which 
the  bank  is  organized. 

Further,  a  system  of  bond-secured  issues  is  in- 
elastic. The  volume  of  notes  depends  primarily 
on  the  price  of  bonds,  and  not  on  the  amount  of 
commercial  paper  offered  for  discount.  If  busi- 
ness is  expanding  and  the  need  for  currency  be- 
comes greater,  it  can  be  supplied  only  by  buying 
bonds.  But  the  briskness  of  business  which 
causes  the  demand  for  more  currency  also  raises 
the  prices  of  bonds,  so  that  their  purchase  as  a 
379 


MONEY 

basis  for  new  issues  is  less  profitable.  When  busi- 
ness is  dull,  the  prices  of  bonds  fall  and  lead  to  an 
increased  output  of  notes,  although  the  need  for 
more  is  less.  Moreover,  the  enlargement  and  con- 
traction of  the  circulation  under  this  system  is  not 
immediate  and  automatic.  Administrative  ma- 
chinery must  first  be  put  in  motion,  and  this 
usually  requires  so  much  time  that  the  pressure  of 
demand  may  pass  before  it  can  be  met. 

Still  further,  under  the  bond-security  system  of 
note  issue,  the  expansion  and  contraction  of  the 
currency  may  be  adversely  affected  by  local  rates 
of  discount.  If  the  price  of  bonds  is  low,  places 
in  which  the  rate  of  discount  is  low  may  find  it 
more  profitable  to  buy  bonds  as  a  basis  of  further 
note  issue ;  while  other  places,  in  which  the  rate 
of  discount  is  high,  and  in  which,  therefore,  there 
is  need  of  an  expansion  of  the  currency,  may  find 
it  less  profitable  to  purchase  bonds  than  to  use 
their  capital  as  an  immediate  basis  of  discount. 

The  compulsory  investment  of  bonds  under  cir- 
cumstances like  the  above,  constitutes  in  effect  a 
forced  loan  from  the  community  where  interest  is 
high  to  one  where  interest  is  low.  Those  who  are 
in  need  of  all  their  capital  are  compelled,  in  other 
words,  to  share  its  use  with  people  who  are  in  less 
need  than  themselves. 

Nor  are  notes  secured  by  the  deposit  of  bonds 
necessarily  safer  than  issues  based  on  a  partial 
metallic  reserve.  For  if  the  credit  of  the  govern- 
ment is  impaired,  its  bonds  will  sink  in  price,  and 
380 


CONVERTIBLE    PAPER    CURRENCY 

the  security  will  be  lessened.  "  The  issue  of  notes 
against  deposited  securities  did  not  save  the  note- 
holders from  loss  before  the  war,  while  careful 
and  intelligent  systems  of  banking  like  those  of 
Louisiana,  Massachusetts,  and  the  state  banks  of 
Indiana  and  Ohio  did  protect  them  fully."  1  Of 
course,  these  remarks  about  the  safety  of  notes 
secured  by  government  bonds  lose  much  of  their 
force  in  the  case  of  a  strong  and  wealthy  popular 
government  like  our  own.  There  is  certainly  no 
more  danger  —  most  of  us  will  say  far  less  —  that 
the  safety  of  our  national  bank  notes  will  be  im- 
perilled by  impaired  national  credit  than  there 
would  be  if  their  management  were  left  wholly  to 
the  banks  that  issue  them. 

The  bond-deposit  system  of  security  is  also 
objectionable  because  it  makes  necessary  a  per- 
manent public  debt.  The  rapid  retirement  of 
United  States  bonds  available  as  a  basis  of  circu- 
lation has  at  times  raised  a  question  as  to  the 
permanence  of  our  system  of  note  issue.  Indeed, 
resort  to  other  kinds  of  bonds  has  at  times  been 
urged,  such  as  bonds  of  states  and  cities,  and  of 
great  corporations.  Such  a  step  is  to  be  depre- 
cated. No  matter  how  great  the  care  with  which 
such  bonds  may  be  chosen,  public  confidence  in 
them  would  never  be  so  great  as  in  those  of  the 
national  government,  and  trust  in  our  bank  paper 
could  not  fail  to  be  shaken  by  their  use. 

17.    The  Safety-fund  Method. —  Notes  may  also 

1  Horace  White,  Annals  Amer.  A  cad.,  March,  1893,  P-  2O- 
381 


MONEY 

be  kept  convertible  by  the  creation  of  a  common 
fund  of  specie  by  contribution  from  the  note-emit- 
ting banks.  This  fund,  called  a  safety  fund,  is  de- 
posited with  some  public  officer,  the  Comptroller 
of  the  Currency,  for  example,  and  out  of  it  are 
redeemed  the  notes  of  any  banks  which  fail.  If 
the  fund  is  impaired  by  such  redemptions,  it  must 
be  restored  by  further  contributions.  The  expe- 
rience of  forty  years  with  our  present  national 
banking  system  has  shown  that  the  fund  which 
would  have  been  required  to  cover  the  losses  on 
notes,  caused  by  all  the  failures  of  the  period, 
could  have  been  provided  by  a  tax  of  about  one- 
fifth  of  one  per  cent,  per  annum  on  the  circulation. 
A  fund  which  would  fully  insure  the  safety  of  the 
notes  could  therefore  be  created  and  maintained 
by  so  small  a  tax  on  circulation  that  no  bank  could 
reasonably  object  to  it. 

The  safety-fund  system  leaves  the  volume  of 
notes  absolutely  free  to  respond  to  business  needs 
for  currency ;  it  would  leave  the  capital  stock  of 
the  banks  free  for  ordinary  banking  business,  and 
it  would  provide  as  safe  a  currency  as  does  our 
present  system. 

18.  Notes  issued  on  General  Assets.  —  If  no 
special  provision  is  made  for  the  security  of  notes, 
but  they  are  treated  simply  as  one  of  the  liabilities 
of  the  bank,  dependent  on  its  property  and  general 
credit,  the  notes  are  said  to  be  issued  against  gen- 
eral assets.  This  system  properly  regards  notes 
and  deposits  subject  to  check  as  liabilities  of  iden- 

3*2 


CONVERTIBLE    PAPER    CURRENCY 

tical  character,  and  aims  to  provide  for  the  proper 
protection  of  both  indifferently.  With  good  bank- 
ing, this  system  is  scientifically  perfect;  but,  as 
has  been  pointed  out,  experience  shows  that  bank 
managers  cannot,  any  more  than  other  industrial 
leaders,  always  be  depended  upon  for  unerring 
sagacity  and  continued  honesty.  Hence,  bad  bank- 
ing occurs,  and  would  be  likely  to  cause  greater 
hardship  in  case  of  a  failure,  under  a  system 
of  asset  issue.  As  a  precaution,  it  is  frequently 
proposed  to  make  the  notes  a  first  lien  on  the 
assets.  Doubtless  this  additional  security  would 
in  most  cases  suffice.  For  the  notes  are  becoming 
a  much  smaller  proportion  of  total  liabilities,  be- 
cause the  growth  of  deposits,  against  which  checks 
are  drawn,  is  more  rapid  than  the  growth  of  notes. 
It  is  difficult,  however,  to  convince  the  public  that 
this  is  the  case  ;  and  in  the  matter  of  note  issue 
the  establishment  of  public  confidence  is  absolutely 
essential. 

19.  The  Advantages  of  Combining  Several 
Methods.  —  It  is  evident  that  no  plan  of  insur- 
ing the  immediate  payment  of  notes  in  specie  is 
free  from  objection.  No  plan  can  be  devised  for 
insuring  escape  from  reliance,  somewhere  in  the 
management,  on  the  integrity  and  faithfulness  of 
men.  Two  purposes,  incompatible  in  their  nature, 
are  aimed  at  by  every  scheme  for  regulating  bank 
credits.  One  is  to  secure  for  society  the  saving 
afforded  by  dispensing  with  gold ;  the  other  is  to 
avoid  the  dangers  of  inflation  and  depreciation  that 

3S3 


MONEY 

accompany  the  use  of  paper.  Now,  it  is  idle  to 
expect  that  the  full  benefits  can  be  obtained  at  the 
same  time  that  all  of  the  danger  is  avoided.  One 
might  as  well  expect  to  secure  the  rapid  transpor- 
tation furnished  by  a  modern  express  train,  and 
at  the  same  time  suffer  no  greater  loss  or  injury 
from  its  wreck  than  one  would  suffer  if  travelling 
in  an  ox  cart  that  lost  its  wheel.  The  benefits  of 
complicated  machinery  cannot  be  had  without  in- 
curring risks  of  greater  loss  than  was  experienced 
under  simpler  conditions,  when  the  storm  and 
stress  of  life  break  upon  the  more  complex  ar- 
rangements of  society.  All  that  we  can  reasonably 
ask  is  to  secure  a  balance  of  advantage  and  risk  of 
loss.  In  the  matter  of  paper  money  it  is  far  better 
to  aim  at  a  small  portion  of  the  advantages  of  its 
use,  and  run  but  little  risk  of  loss,  than  to  try  to 
secure  a  large  advantage  at  great  risk.  For  in 
case  of  the  failure  of  any  bank  to  pay  its  notes  on 
demand,  the  loss  falls  on  many  innocent  people, 
and  is  likely  to  be  distributed  much  more  widely 
than  is  the  case  with  the  benefits  during  a  period 
of  successful  management. 

In  view  of  these  facts,  that  system  of  manage- 
ment of  bank  issues  is  best  which  minimizes  the 
danger  of  loss,  whether  by  restricting  the  issues 
well  within  the  limits  of  safety  or  by  insisting  on 
the  provision  of  an  adequate  reserve.  On  the 
other  hand,  there  is  such  a  thing  as  making  the 
notes  too  good.  If  they  are  put  wholly  beyond 
the  risk  of  loss,  their  elasticity  is  interfered  with. 
384 


CONVERTIBLE    PAPER    CURRENCY 

While  business  people  who  receive  notes  will  de- 
posit them  for  the  sake  of  receiving  interest,  this 
motive  is  of  small  force  when  the  amount  to  be 
deposited  is  small.  In  such  a  case  the  paper  is 
just  as  likely  to  be  kept  on  hand  by  numerous 
small  holders,  if  they  feel  that  there  is  no  danger 
at  all  that  it  will  not  be  redeemed.  If  there  are 
any  notes  which  are  not  protected  by  their  equiva- 
lent in  metallic  money,  there  is  some  risk.  This 
danger  is  more  or  less,  according  to  the  amount 
of  metallic  reserve  held.  The  amount  left  unpro- 
tected should  be  large  enough  to  remind  holders 
that  it  is  to  their  interest  constantly  to  demand 
redemption. 

A  specie  reserve  should  actually  be  held  some- 
where. It  is  sometimes  said  that  the  reserve  should 
be  made  profitable  by  investment,  for  example,  in 
government  bonds.  But  if  it  is  so  used,  it  is  no 
longer  a  specie  reserve.  It  is  idle  to  try  to  devise 
a  plan  whereby  a  specie  reserve  can  be  kept  for 
the  purpose  of  redeeming  notes,  and  used  for 
profit  at  the  same  time.  The  two  things  are  in- 
compatible. There  is  no  way  of  making  a  profit 
on  idle  capital,  and  money  kept  for  reserve  is  idle 
capital ;  or,  at  any  rate,  capital  which  is  productive 
only  in  an  indirect  way.  It  is  productive  only  in 
the  sense  that  it  makes  the  employment  of  the 
rest  of  the  capital  safer,  or  lessens  the  probability 
of  a  loss. 

20.  Comparative  Advantages  and  Disadvantages 
of  Government  and  Bank  Issues.  —  We  have  seen 

385 


MONEY 

that  paper  money  may  be  issued  either  by  banks 
or  governments.  If  the  notes  issued  are  gen- 
erally acceptable,  they  will  serve  the  purpose  of 
a  medium  of  exchange.  Several  reasons  are  ad- 
vanced, however,  against  the  exercise  of  the  func- 
tion of  issue  by  governments.  In  the  first  place, 
it  is  argued  that  the  issue  of  paper  money  is  not 
a  proper  function  of  the  government.  We  cannot 
here  go  into  a  discussion  of  the  proper  sphere  of 
government,  and  it  is  well  not  to  dogmatize  about 
it.  Whether  or  not  the  statement  is  true  depends 
on  one's  ideas  as  to  what  are  the  proper  functions 
of  government.  It  may  be  said,  however,  without 
fear  of  successful  contradiction,  that  the  experience 
of  governments  that  have  issued  paper  money  has 
been  so  generally  disastrous  as  to  establish  in  a 
high  degree  the  improbability  of  success  in  main- 
taining the  notes  convertible  at  par  in  times  of 
fiscal  exigency.  Experience,  therefore,  is  against 
government  issues.  The  argument  that  the  issue 
of  paper  money  is  equivalent  to  coinage,  and  there- 
fore is  a  sovereign  function  to  be  exercised  by 
the  government,  is  based  on  a  wrong  notion  of  the 
nature  of  coinage.  The  coinage  of  specie  and  the 
engraving  of  paper  money  differ  in  a  very  impor- 
tant particular,  and  that,  too,  a  particular  which 
justifies  us  in  calling  the  issue  of  one  a  sovereign 
function  and  that  of  the  other  not  so.  Notes  are 
a  species  of  credit  instruments  ;  gold  is  not.  For 
the  government  to  go  into  the  business  of  issuing 
paper  money  is,  therefore,  to  draw  on  its  credit, 
386 


CONVERTIBLE  PAPER  CURRENCY 

and  to  lay  itself  open  to  the  possibility  of  financial 
weakness  in  times  of  sudden  fiscal  stress.  In  per- 
forming the  function  of  coinage  proper,  govern- 
ments incur  no  liability  ;  in  issuing  notes,  they  do. 
The  likelihood  of  excessive  issues  is  greater  with 
government  paper  than  with  bank  issues.  Offi- 
cers of  the  government  are  likely  to  be  influenced 
to  issue  paper  money  beyond  the  needs  of  busi- 
ness, by  the  necessities  of  the  public  treasury,  or  by 
public  clamor,  or  by  the  ignorance  and  corruption 
of  lawmakers.  Yet  it  is  also  true  that  bankers 
have  sometimes  yielded  to  the  same  temptation  for 
their  own  profit.  It  may  be  fairly  said  that,  as  a 
rule,  we  can  expect  as  much  honesty  in  the  manage- 
ment of  our  public  finances  as  has  been  shown  by 
private  corporations  that  have  had  the  privilege  of 
issuing  paper  money.  It  would  be  rash  to  say  that 
the  distress  caused  by  our  own  early  banking,  or 
by  the  depreciation  of  Bank  of  England  notes  pre- 
viously to  1819,  was  less  than  the  evils  caused  over 
equal  periods  from  excessive  government  issues. 
Therefore,  no  argument  for  or  against  government 
issues,  founded  on  the  honesty  or  efficiency  of  the 
government  as  compared  with  private  corporations, 
is  of  much  permanent  weight.  There  is,  however, 
a  very  strong  argument  in  favor  of  private  issues  in 
the  fact  that  they  should  come  out  in  response  to 
business  demand,  that  the  amount  of  notes  should 
adapt  itself  to  the  need  of  the  country  for  currency. 
It  is  easy  enough  for  government  issues  to  expand, 
but  very  difficult  for  them  to  contract.  Hard  meas- 
387 


MONEY 

ures,  such  as  bond  sales  or  higher  taxes,  are  usu- 
ally needed  for  contraction.  But  neither  of  these 
methods  is  directly  related  to  business  ;  and  contrac- 
tion, when  it  comes,  may  be  either  more  or  less 
than  business  requires. 

It  has  been  suggested,  even  by  so  high  an 
authority  as  Ricardo,1  that  a  government  commis- 
sion for  the  regulation  of  paper  money  might  suc- 
cessfully vary  the  currency  in  response  to  the  ebb 
and  flow  of  business  demand.  This,  of  course,  is 
possible,  provided  that  this  commission  acted  as 
bankers.  It  is  likely,  however,  that  people  would 
rely  too  much  on  such  a  commission,  and  so  en- 
courage speculation.  The  work  which  Ricardo 
proposes  for  such  a  commission  is,  of  course,  very 
different  from  what  is  in  the  minds  of  those  people 
who  propose  a  commission  to  vary  the  currency 
for  the  purpose  of  keeping  the  price  level  con- 
stant. 

It  is  sometimes  urged  against  private  bank  issues, 
that  the  conferring  of  the  power  of  issue  on  banks 
is  likely  to  create  a  money  power  whose  interests 
run  contrary  to  those  of  the  people  at  large.  This 
argument  is  not  to  be  altogether  ridiculed.  It  cer- 
tainly is  not  true  that  the  interests  of  the  banks 
and  the  interests  of  the  people  are  always  identi- 
cal. In  a  higher  sense,  indeed,  they  are  so,  in  the 
long  run,  but  at  particular  times  they  may  be  oppo- 
site. But  this  is  really  an  argument  for  controlling 
banks,  not  for  forbidding  them  to  issue  notes.  Cer- 

1  Works,  McCulloch's  ed.,  p.  219. 
388 


CONVERTIBLE    PAPER    CURRENCY 

tainly  no  one's  rights  are  curtailed  and  no  harm  is 
done  by  a  proper  regulation  of  the  power  of  issue. 
The  gain  allowed  banks  of  issue  for  their  services 
to  the  public  should  not  be  excessive,  and  they 
should  be  so  restricted  by  law  as  to  be  continually 
reminded  that  they  are  in  a  measure  public  institu- 
tions bound  to  care  for  the  public  interests  as  well 
as  for  the  interests  of  their  private  stockholders. 

While,  then,  we  may  not  admit  that  governments 
cannot  take  care  of  the  interests  of  their  people, 
even  in  the  matter  of  the  issue  of  paper  money,  it 
is  better  not  to  rely  too  much  on  their  intelligence 
and  wisdom  in  such  a  matter.  We  should  aim  to 
secure  to  the  country  as  much  as  possible  of  the 
gain  from  the  use  of  paper  money,  while  avoiding 
as  much  as  possible  of  the  loss  that  comes  from  its 
excessive  use.  It  is  easier  for  the  government  to 
control  the  banks  in  their  issues  than  it  is  to  man- 
age the  business  itself. 


389 


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de  la  Monnoie  de  Copernic.  Paris,  1864, 

-  L'Or  et  1' Argent.     Paris,  1870. 

-  Le  Change  et  la  Circulation.     Paris,  1869. 

Wood,  J.  P.     Memoirs  of  the  Life  of  John  Law  of  Lauris- 
ton.     Edinburgh,  1824. 
409 


INDEX 


Abrasion,  33. 

Allison,  Sir  Archibald,  on  effect  of 
scarcity  of  money,  5. 

Appreciation,  causes  of,  193-196; 
disadvantages  of,  191-193  ;  distri- 
bution of  effects  of,  182-187 1  an<i 
debts,  190-191,  320;  and  indus- 
trial improvements,  318  ;  and  in- 
terest, 322-326  ;  and  the  laborer, 
318;  manifestations  of,  179-180; 
meanings  of,  177-179  ;  phases  of, 
180-182. 

Aristophanes,  reference  in,  to  bad 
money,  53,  note. 

Aristotle,  on  the  origin  of  money, 
15-16. 

Asset  currency,  382-383. 

Assignats,  French,  352-353. 

Balance  of  indebtedness,  and  credit, 
206-212;  and  prices,  215-218. 

Banking  theory  of  note  issue,  363- 
365.  369~372. 

Banknotes,  358-359;  comparative 
advantage  of  government  and, 
385-389;  regulation  of,  372-385. 

Banks,  increase  in  number  of,  107  ; 
power  of  note  emission,  365- 

369- 
Barter,   18,  19,  26,  60;    advantages 


of  money  exchange 
127 ;  and  the  value 
133-134, 160-162. 


over,    126- 
of    money, 


Bills  of  exchange,  and  movement 
of  precious  metals,  90-93. 

Bimetallism,  292-316;  advantages 
of,  294-296 ;  burden  of  debts 
under,  304-306 ;  compensatory 


action  of  the  double  standard, 
296-299;  depreciation  and,  306; 
and  Gresham's  law,  297 ;  in 
France,  296,  308 ;  increase  in 
gold  and,  309-310;  Latin  Mone- 
tary Union  and,  308 ;  obstacles 
to  international,  307-309 ;  and  the 
par  of  foreign  exchange,  295  ;  and 
prices,  301-304 ;  and  the  ratio  of 
gold  to  silver,  296-301. 

Bond  deposit  system  of  note  issue, 
378-381. 

Brassage,  34. 

Business,  volume  of,  and  the  quan- 
tity of  money,  101 ;  volume  of,  and 
the  value  of  money,  146-149. 

Cairnes,  Professor  J.  E.,  on  distri- 
bution of  precious  metals,  87. 

Cancellation  of  indebtedness,  206- 
212. 

Capital,  money  a  general  form  of, 
9,67. 

Checks  and  reserves,  219. 

Circulation,  by  tale,  32;  causes  of, 
50-52;  Gresham's  law  of,  52-58; 
of  metallic  money,  48-49;  of 
paper  money,  49-56;  principles 
of,  50-58;  rapidity  of,  101,  103, 
151-158,  363. 

Clark,  Professor  J.  B.,  on  the  stand- 
ard of  deferred  payments,  283. 

Clearing-house,  222-223. 

Coinage,  27-38  ;  charge  for,  34-38; 
international,  8-9;  materials  used 
in,  29-31,  72-77;  origin  of,  29- 
30,  33  ;  requisites  of  good,  31-33  ; 
right  of,  33. 


411 


INDEX 


Commissions  for  regulation  of  price 

level,  313-316. 
Commodity  money,  20-23,  71-76; 

characteristics   of   good,   72-77 ; 

value  of,  141-143. 
Compensatory  action  of  the  double 

standard,  296-298. 
Consumption  of  wealth,  effects  of 

money  on  the,  9-11. 
Convertibility,  meaning  of,  330. 
Convertible   paper   currency,  355- 

389- 

Cost  of  money  and  its  value,  163- 
165 ;  to  a  country,  171-172. 

Credit,  adaptation  of,  to  scale  of 
exchanges,  108-112;  definition 
of,  199-201 ;  and  amount  of 
money  needed,  105, 114-119;  and 
cancellation  of  indebtedness,  206- 
208 ;  and  crises,  223 ;  and  dis- 
tribution of  the  precious  metals, 
89-96;  instruments  of,  43-44, 
110-112,202;  limits  of,  109 ;  and 
money,  220-221 ;  and  prices,  199- 
223 ;  and  volume  of  business, 
107;  and  wage  period,  112. 

Creditor,  effects  of  change  in  stand- 
ard on,  190-191,  262-265. 

Currency,  composition  of,  40;  de- 
posit, 221-223  ;  systems  of  metal- 
lic, 47-49;  systems  of  paper, 
49-50. 

Currency    theory    of    note    issue, 

363-365- 

Debtors,  and  changes  in  the  stand- 
ard, 190-191,  262-265,  317-318; 
and  industrial  improvements, 
318;  and  paper  money,  351-352. 

Debts,  and  appreciation,  190-191, 
320;  burden  of,  and  bimetallism, 
304-306 ;  burden  of,  lessened  by 
various  factors,  317-328;  and 
rate  of  interest,  322-326;  charac- 
ter of  modern,  319-320. 

Deferred  payments,  standard  of. 
See  STANDARD. 


Denominations  of  money,  relation 
of,  to  scale  of  incomes  and  prices, 
41-43;  paper,  112-114. 

Deposit  currency,  43-44,  221-223. 

Depreciation,  causes  of,  193-196 ; 
degree  of,  with  inconvertible 
paper,  344-347 ;  disadvantages 
of,  191-193;  distribution  of  effects 
of,  182-184, 185-187 ;  meanings  of, 
177-179 ;  of  standard,  262-263. 

Discounts,  359. 

Distribution  of  the  precious  metals, 
78-122;  between  gold  and  silver 
standard  countries,  96 ;  credit 
and  the,  89-95 ;  double  meaning 
of,  99 ;  and  the  foreign  exchanges, 
90-95 ;  national  habit  and  the, 
88 ;  rate  of  discount  and  the,  94 ; 
Ricardian  theory  of  the,  81-88 ; 
trade  conditions  and  the,  83-86. 

Distribution  of  wealth,  effects  of 
money  exchange  on  the,  11-13, 
65,  190. 

Disutility  of  labor  standard  of  de- 
ferred payments,  283. 

Double  standard.  See  BIMETAL- 
LISM. 

Economist,  index  numbers  of  Lon- 
don, 245-247. 

Edgeworth,  Professor  F.  Y.,  on 
measuring  price  changes,  240,258. 

Elasticity  of  the  currency,  359-363. 

Essars,  Professor,  on  rapidity  of 
circulation,  219. 

Evolution  of  money,  14-26,  29. 

Exchange,  progress  and  the  system 
of,  i;  methods  of,  18-19;  system 
of,  and  the  money  demand,  105. 

Exchanges,  volume  of,  and  amount 
of  money,  101-104;  volume  of, 
and  credit,  108. 

Exportation  of  the  precious  metals, 
78. 


Falkner,  Professor  R.  P.,  on  index 

numbers,  234,  253-255. 


412 


INDEX 


Fisher,  Professor  Irving,  on  mar- 
ginal utility  and  prices,  174;  on 
appreciation  and  interest,  322-326. 

Foreign  exchanges,  and  movement 
of  precious  metals,  90-95 ;  and 
paper  money,  338-339. 

Free  coinage,  34. 

Freedom,  the  monetary  system 
and,  6. 

Functions  of  money.  See  SER- 
VICES OF  MONEY. 

Giffen,  Sir  Robert,  on  appreciation, 
179 ;  on  index  numbers,  235, 
258. 

Gold,  increase  of,  and  bimetallism, 
309;  monometallism,  327-328; 
premium  on,  and  depreciation 
of  paper,  337-339-  342-343 ',  in- 
creased production  and  value  of, 
167-170,  187-190,  193-195  ;  value 
of,  in  arts  and  as  money, 
195-196. 

Government  paper  money,  332-335, 
350-353.  356-358,  385-389- 

Greenbacks,  United  States,  353. 

Gresham's  law,  52-58,  297. 

Hildebrand,  on  monetary  evolution, 

16. 
History,  early,  of  money,  14-17. 

Incomes,  scale  of,  and  denomina- 
tions of  money  in  use,  4,  113. 
Inconvertible   paper    money,  329- 

354- 

Index  numbers,  227-256;  Econo- 
mist table  of,  245-246  ;  Falkner's 
tables  of,  253-255;  Jevons  on, 
247 ;  Sauerbeck's  tables  of, 
250-252 ;  Soetbeer's  tables  of, 
247-250 ;  regulation  of  prices  by, 
3i3-3i6. 

Interest,  appreciation  and,  322-326. 


Jacob,  William,  on  production  of 
gold  and  silver,  165-166. 


Jevons,  Professor  W.  S.,  on  index 
numbers,  247  ;  on  metallic  money, 


Labor,  as  a  standard  of  deferred 
payments,  281-284;  effects  of 
appreciation  on,  318 ;  monetary 
system  and  division  of,  5. 

Latin  Monetary  Union,  308. 

Legal  tender,  47. 

Mandats,  French,  352. 

Marginal  utility,  of  money,  159- 
162,  206-207,  212-213 !  °f  goods, 
134,  174-175 ;  standard  of  de- 
ferred payments,  284. 

Markets  and  the  development  of 
money  exchange,  24. 

Marshall,  Professor  Alfred,  on 
index  numbers,  236,  238. 

Martin,  J.  B.,  on  denominations 
of  bank  notes,  113. 

Medium  of  exchange,  composition 
of,  20-21,  39-46,  60. 

Metals  as  money,  24 ;  distribution 
of,  78-122;  production  of,  165- 
171.  See  GOLD  and  SILVER. 

Minimum  reserve  method  of  note 
issue,  375-376. 

Mint  price,  37. 

Monometallism,  gold,  327-328. 

Multiple  standard.  See  TABULAR 
STANDARD. 

Nationality,  the  monetary  system 
and,  8. 

Newcomb,  Professor  S.,  on  meas- 
uring price  changes,  256. 

Nicholson,  Professor  J.  S.,  on 
measuring  price  changes,  257. 

Palgrave,  R.  H.  I.,  on  index  num- 
bers, 234. 

Paper  money,  circulation  of,  41-43, 
50-58,  332  ;  convertible,  329-330, 
355-389  ;  irredeemable,  331-354  ; 
kinds  of,  329-330;  over-issue  of, 


413 


INDEX 


341-349,    387-389;     systems    of, 

49- 

Paulus  on  origin  of  money,  16. 

Population  and  amount  of  money, 
100,  105-108. 

Premium  on  gold,  337-339, 344-347. 

Price  defined,  63. 

Price,  Professor  Bonamy.on  mone- 
tary evolution,  20. 

Prices,  balance  of  indebtedness 
and,  212-214;  changes  in,  102, 
187-197,  224-259  ;  cost  of  pro- 
duction and,  184-185;  credit  and, 
197,  202,  208,  219-223;  distribu- 
tion of  precious  metals  and,  81- 
86;  level  of,  81,  83-86,  124,  150, 
313-317;  marginal  utility  and, 
174-175 ;  normal  case  of  falling, 
187-190;  paper  money  and,  341- 
344 ;  relative,  124,  172-175 ;  ser-. 
vices  of  tables  of,  239-244;  U.  S. 
Senate  report  on,  253-255 ;  vol- 
ume of  business  and,  146-149; 
wages  and,  185-187.  See  APPRE- 
CIATION, BIMETALLISM,  DE- 
PRECIATION, INDEX  NUMBERS, 
STANDARD  OF  DEFERRED  PAY- 
MENTS. 

Production  of  goods  and  quantity 
of  money,  162. 

Progress  and  the  system  of  ex- 
change, i. 

Proportional  reserve  method  of 
note  issue,  376. 

Prosperity,  the  monetary  system 
and,  9. 

Purchaser's  surplus  standard  of 
deferred  payments,  287-291. 

Quantity  of  money,  needed  by  a 
country,  97,  99-122;  and  its 
value,  139-143,  158-160, 167,  170- 
171,  196-198,  313-316,  339-341. 

Rapidity   of  circulation,   101,  151- 

i58.  363- 
Ratio,  the  bimetallic,  296-301. 


Representative  paper  money,  329- 

33°- 
Reserve,  specie,  312-214,  219,  357- 

358,  374-378,  385. 
Ricardo,  David,  on  the  distribution 

of  the  precious  metals,  81-88  ;  on 

regulation  of  paper  currency,  388. 

Safety-fund  system  of  note  issue, 
381-382. 

Sauerbeck,  on  falling  prices,  197; 
on  index  numbers,  234,  250-252. 

Securities,  stock,  as  currency,  45. 

Seigniorage,  34. 

Services  of  money,  19,  59-70. 

Sherman  silver  law,  56. 

Silver,  demonetization  of,  194 ;  pro- 
duction of,  165-167 ;  ratio  of,  to 
gold,  296-301 ;  Sherman  law, 
56. 

Socialism,   monetary  system    and, 

13- 
Soetbeer,  A.,    on    index   numbers, 

234.  247-250. 

Speculation  and  price  changes,  322. 

Standard  of  deferred  payments, 
260-291 ;  invariable,  268-269 ; 
disutility  of  labor,  283;  equities 
of  changing,  262-266,  269-272, 
326-327;  labor-cost,  281-282; 
labor-time,  281 ;  marginal  utility, 
284 ;  purchaser's  surplus,  287- 
291 ;  single  commodity,  273-275; 
a  social  concept,  266-268  ;  stabil- 
ity of,  261-262 ;  the  tabular,  275- 
281 ;  total  utility,  285-287. 

Standard  money,  46. 

Store  of  value,  money  as  a,  64-65. 

Subsidiary  coins,  37,  42-43. 

Symmetallism,  311. 

Table  of  prices.    See  INDEX  NUM- 

liERS. 

Tabular  standard,  275-281. 
Tolerance  of  the  mint,  32. 
Transportation,     development    of, 

and  prices,  196-197. 


414 


INDEX 


Truck  payments,  7. 
United  States  notes,  353. 

Value,  measure  of,  61-63. 

Value  of  money,  123-149;  barter 
and  the,  133-134, 160-162 ;  causes 
of  changes  in,  176-198,  224-259; 
cost  of  production  and  the, 
163-165 ;  credit  and  the,  134, 
160-162 ;  an  equilibrium  between 
various  demands  and  the  sup- 
ply, 135-145 ;  local,  171-172 ; 
quantity  theory  of  the,  139-144, 


158-160,  167-171,  196-198,  313- 
3J6,  339-344 ;  rapidity  of  circula- 
tion and  the,  153-155 ;  a  social 
phenomenon,  125-126;  as  a 
social  investment,  127-130;  sta- 
bility of  the,  71,  150-175  ;  volume 
of  business  and,  146-149. 


Wages,  credit  payments  and,  112; 
falling  prices  and,  185-187 ;  pa- 
per money  and,  350. 

Wealth,  monetary  system  and  the 
distribution  of,  11-13. 


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